Wake-Up Call to Washington: Cut Corporate Taxes

From The Tax Foundation in August 2008, but still very relevant today, maybe even more relevant today:

Amid rising concerns about the state of the U.S. economy, new data compiled by economists at the OECD shows that for the 17th consecutive year the average rate of corporate taxes in non-U.S. countries fell while the U.S. corporate tax rate stayed the same. As a result, the overall U.S. corporate tax rate is now 50% higher than the OECD average (see chart above).

Combined with another new OECD study that calls the corporate income tax the most harmful type of tax for economic growth, the implications for U.S. policy are clear. The long-term prospects of the U.S. economy are at risk as long as our corporate tax rate remains out of step with the rest of the world.

The U.S. continues to have the second-highest combined federal-state corporate tax rate among industrialized countries at 39.3%. Only Japan has a higher overall corporate tax rate at 39.5% percent. By contrast, the average corporate tax rate among OECD countries has fallen a full percentage point in the past year, from 27.6% to 26.6%. Ireland's 12.5% corporate tax rate remains the lowest among OECD nations.

The OECD study also found that statutory corporate tax rates have a negative effect on firms that are in the "process of catching up with the productivity performance of the best practice firms." This suggests that "lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth."

The main recommendation of the study is that if countries want to enhance their economic growth they would do well to move away from income taxes—especially corporate income taxes—toward less distortive taxes such as consumption-based taxes. The key to creating a growth-oriented corporate income tax system is to impose a reasonably low tax rate with few exemptions.

The release of these two OECD studies could not have come at a better time for the current political debate over how to move the U.S. economy forward. A U.S. corporate tax rate 50% higher than the OECD average should be a wake-up call to Washington, especially when combined with the empirical evidence that corporate taxes are the most harmful tax on economic growth.

MP: This post was inspired by a lively debate last night on "Kudlow and Company" about the desirability and effectiveness of cutting corporate taxes as a way to stimulate the U.S. economy (second segment here). Former Labor Secretary Robert Reich and Keith Boykin argued against supply-side tax cuts, and Kevin Hassett, Dan Mitchell and host Larry Kudlow argued in favor of corporate (and other) tax cuts.

From a recent edition of The Gartman Letter, let's not forget the wise words of Walter Wriston (Citibank CEO in the 1970s):

Capital will always go where it’s welcome and stay where it’s well treated. Capital is not just money. It’s also talent and ideas. They, too, will go where they’re welcome and stay where they are well treated.

Bottom Line: In an intensely competitive global economy, with increasing capital mobility, and with an increasing ability to locate production globally, a corporate tax rate 50% above the OECD average seems like a guaranteed way to continue to put U.S. businesses at a competitive disadvantage, and a sure way to guarantee that the U.S. manufacturing will continue to decline as production and output shifts to lower-tax countries.