Friday, August 15, 2008

Self Inflicted Wounds

The WSJ has an editorial today entitled, "American the Uncompetitive", which details the excessiveness of our corporate income tax:

The new international tax rankings are out for 2008, and congratulations to Washington, D.C., are again in order. Our political class has managed to maintain America's rank with the second highest corporate tax rate in the world at 39.3% (average combined federal and state).

Only Japan is slightly higher overall, though if you are silly enough to base a corporation in California, Iowa, New Jersey, Pennsylvania, or other states with high corporate levies, your tax rate on business income is even higher than in Tokyo. For the first time, the U.S. statutory rate is now 50% higher than the average of our international competitors, continuing a long-term trend as the rest of the world keeps reducing corporate tax rates. (See nearby chart).




A new OECD study, "Taxes and Economic Growth," examines national tax burdens and their impact on growth and incomes in member countries. It concludes that "corporate taxes are most harmful for growth, followed by personal income taxes, and then consumption taxes." The study adds that "investment is adversely affected by corporate taxation," and that the most profitable and rapidly growing companies tend to be the most sensitive to high business tax rates.


There is, of course, no such thing as a corporate tax. Taxes are always paid by individuals. If a corporation pays a tax it is coming from either their customers (in the form of higher prices), their employees (in the form of lower wages), or shareholders (in the form of lower returns). So, corporate taxes are ultimately just another way for DC to take money out of your pocket.

At a time when there is considerable debate about whether we will follow Japan's path of the last 15 years of stagnation, you would think someone in DC might look at the fact that our tax rate is about the same as theirs and ask if that might have an impact. Alas, no. Politicians are in populist mode and blaming corporations for all our troubles, from high oil prices to expensive health care.

If we want to attract capital to the US, and we must with our deficits, we have to make it attractive to investors. Frankly, I think the corporate income tax should be eliminated. In the editorial, the WSJ quotes a Tresury study:

The average European nation has tax rates on corporate income 10 percentage points lower than the U.S., but those countries on average raise 50% more as a share of GDP in corporate taxes than does the U.S., according to a 2007 study by the Treasury Department. Ireland with its 12.5% rate captures a higher share of its GDP (3.4%) in corporate taxes than the U.S. does (2.5%) with its 39.3% rate.


Doesn't that make it obvious that we are past the peak of the Laffer curve? Furthermore, considering the distortions caused by corporate taxes and the small amount of revenue collected, why not just eliminate the tax? I don't know if it would pay for itself, but it seems likely that higher growth would generate more personal income and thus more tax revenue from that source. In addition, eliminating the corporate tax would increase the demand for dollars and thereby reduce inflation. Finally, the real bonus is in the reduction of corruption on Capital Hill. With no corporate tax to avoid and no loopholes to create, the only losers here would be lobbyists and politicians. That's something that everyone should be able to get behind.

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