Saturday, December 06, 2008

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.


At 12/06/2008 2:03 PM, Blogger The Daily Pander said...

As usual, Carpe Diem is spot on. See this post on my views on what editorialists who support the GM bailout don't understand about capital flows

At 12/06/2008 2:12 PM, Anonymous Anonymous said...

With statistics like this, its hard to believe how many people are convinced that US corporations do not pay enough, or pay no taxes. This seems to be the prevailing mindset even though we see continual degradation of our manufacturing base, while overseas entities take their place.
Steve E

At 12/06/2008 2:47 PM, Blogger wcw said...

When in doubt, run the numbers. A post whose source is anything but nonpartisan immediately engenders doubt. Let's check.

The source data are from the OECD. Shall we see where the US ranks in total tax ratio as percentage of GDP?

Funny. The US seems to be lagging behind almost every developed economy except Japan's (with which it is tied). We do raise slightly more taxes than Korea, Turkey and Mexico.

So if you want the US to be more like Korea, Turkey and Mexico, by all means -- cut corporate taxes.

At 12/06/2008 2:49 PM, Anonymous Anonymous said...

From the long point of view, you might be right. However, I don't agree that a tax cut right now is the answer to our crisis.

All that would happen with a tax cut is more hoarding of cash which would only make the recession worse. Large fiscal stimulus is needed. Not in 2 months, not in a month and a half when Obama takes over, it was needed 3 months ago and its still needed NOW!

At 12/06/2008 2:49 PM, Anonymous Anonymous said...

While I think this is a great piece of information. Isn't there a statistic that shows the effective corporate tax rate? Last time I saw that I thought that it is much lower than the tax rate shown here, but still far from being competitive in the world economy. I could be wrong on this if somebody wants to correct me.

At 12/06/2008 2:51 PM, Anonymous Anonymous said...

wcw is correct.

Countries that have low corporate rates need to have those rates to attract companies. They don't have much more going for them.

This might be shocking to Mark Perry and the rest of the supply siders, but taxes are not the only reason countries chose to locate where they do.

In Somalia right now, the corporate tax rate is 0%. Why is there no one setting up their headquarters there?

At 12/06/2008 5:22 PM, Anonymous Anonymous said...

Total tax ratio is not the same as corporate tax ratio.

The other economies listed generally have higher taxes in other areas (income tax, notably).

At 12/06/2008 5:27 PM, Blogger The Daily Pander said...


Is it your position that our country has both relatively high tax rates and relatively low tax revenue (as a percentage of GDP)? Why would it then be unreasonable to argue that relatively low tax rates would generate relatively higher tax revenue (as a percentage of GDP)?

I'd love to see our government swimming in deficit-reducing revenue. If low rates don't generate more revenue and free up more capital for private investment, why would high rates? Why isn't our deficit a function of spending instead of revenue?

At 12/06/2008 11:50 PM, Anonymous Anonymous said...

I am not fond of opaque taxes. Why not eliminate corporate income taxes and tax distributions at the individual level, even at, say, 25 percent?

At 12/07/2008 12:31 AM, Anonymous Anonymous said...

I'd love to see our government swimming in deficit-reducing revenue.

I wouldn't. Deficits are not caused by an undersupply of revenue. If lowering tax rates increases revenue, that proves the tax rate is still too high.

At 12/07/2008 3:46 AM, Blogger juandos said...

Why should we in this country care what a collection of Euro-socialists think or say?

What I don't see anyone wondering about is why is there a federal corporate tax in the first place? What government services are these taxes supposedly paying for?

At 12/07/2008 4:40 AM, Blogger bobble said...

what rate do corps actually pay after deductions?

are there any corps still making a profit to pay a tax on? if not, why would reducing the rate make any difference?

At 12/07/2008 11:45 AM, Anonymous Anonymous said...

This typical corporate tax argument misses the entire point of the Reagan revolution. Over the past 30 years the US has dramatically reduced personal income taxes at the margin relative to Europe and Canada thus reducing the after tax cost of human capital in the US. Corporate taxes have stayed where they were more or less. If people make things happen, not inanimate objects, then our fantastic economic performance relative to Europe and Canada, lower personal taxes some more. Lowering corporate taxes for large companies who never add to job growth and who never stop whining about bailouts and asking for tax breaks for creating the pitiful number of jobs they do actually create is not a good idea. Keep lowering personal taxes and keep MAXIMUM incentives to work relative to our competitors and the US will do really well. If you want to give the big companies a tax break attack capital depreciation where corporations are rewarded for investing in capital goods. The high corporate tax rate in effect leaves money behind for the vast number of foreign companies who come here because of our free economy, lower tax rates would see all this money going to their him countries.

At 12/07/2008 1:24 PM, Blogger wcw said...

DP, tax rates and tax revenues are not positions, they are facts. The headline rates here are accurate, as are the revenues as percentage of GDP. Limiting deductions and aggressively enforcing the laws might generate enough additional revenue to net out lower rates, but that's not fact, that's speculation.

1, the US joined the OECD in 1961. We are the OECD.

bobble, the after-deduction rate is the headline 35% rate, by definition. What you want to know is how much of true profits, rather than accounting profits, are paid. On page 151 of the CBO's budget outlook you'll find historical data. Over the last decade, corporate taxes have averaged 2% of GDP. In the rest of the developed world, a typical number is 3%.

As for our fantastic economic performance relative to Europe and Canada, what? Over the last decade, real US GDP is up less than Canada's and roughly the same as OECD Europe's. Reagan lied a lot; was that your homage?

At 12/08/2008 7:17 AM, Blogger juandos said...

"Reagan lied a lot"...

Hmmm, a bit of the pot calling the kettle black, eh wcw?

What part of the GDP is stolen by the costs of government oversight?

Private Sector's share of the economy - -reduced from a 74% share of the economic pie in 1947 to a 42% share today

At 12/08/2008 9:50 AM, Blogger wcw said...

1, I can enumerate Reagan's bigger lies if you have forgotten too many of them. If you haven't, I am confused. It is very difficult to lie when you are reporting documented fact.

Here, I'll give you an example. You assert, inexplicably, that Private Sector's share of the economy has dropped from 74% in 1947 to 42% today. Actually, those numbers are 85% and 81%.

Enlighten me: am I calling the kettle black because I caught you making up numbers?

At 12/14/2008 7:55 PM, Anonymous Anonymous said...

I agree that our rates on the surface appear higher; however, one must use the effective rate that U.S. corporations actually pay. In doing so, the delta between the U.S. and the OECD countries is minor.


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