Lower corporate tax rates are the best way to get America's economy growing: evidence from two reports this week suggests Congress should get to work on this issue

Ryan Streeter

Chris Edwards at Cato and Kevin Hassett at AEI have each published reports on the corporate tax rate in the U.S. this week.

Given that President Obama has expressed support for corporate tax reform and the bipartisan deficit commission made strong recommendations on its behalf, one can only hope Congress will get around to acting on the matter.

But we’re not hearing very much about it in the midst of the spending cuts debate.

Reading the two reports will convince you that we should.

Edwards’ main points can be summarized as follows:

• The U.S. statutory rate of about 40 percent—including federal and state taxes—will be the highest in the Organization for Economic Cooperation and Development, after Japan cuts its rate as planned in April.

• We find that the U.S. effective corporate tax rate on new investment was 34.6 percent in 2010, which was the highest rate in the OECD and the fifth-highest rate among 83 countries.

• The average OECD rate was 18.6 percent, and the average rate for 83 countries was 17.7 percent.

• America’s largest trading partner, Canada, cut its statutory corporate rate from 43 percent to 29 percent, which helped to bring down its effective rate from 44 percent to 21 percent, according to our calculations. 

• Across-the-board rate cuts matter more than temporary measures, such as bonus depreciation. The one-year bonus depreciation measure passed by Congress for 2011 “reduces the U.S. effective tax rate to as low as 17.5 percent, but this is only a single-year windfall. It does not create certainty for businesses in their capital planning, and it may simply accelerate investment ahead of the normal replacement schedule.”

• In addition, bonus depreciation discriminates against the services sector. This is “because businesses in the services sector use relatively fewer shorter-lived capital assets (e.g., equipment with a useful life of 20 years or less), which qualify for bonus depreciation, and relatively more longer-lived capital assets (e.g., office buildings), which do not qualify for bonus depreciation. Therefore, bonus depreciation is an inferior policy to a substantial statutory tax-rate cut, which would improve long-term investment incentives broadly across the economy.

Edwards points out that the deficit commission's recommendations don't go far enough:

He also cites a couple key findings from recent studies:

• Corporate tax rates affect economic growth more than anything: “[W]hen considering the efficiency characteristics of different taxes, corporate income taxes are the most distortive, and hence the most harmful for economic growth.”

• Corporate tax rate cuts in high- rate countries will probably not cause substantial revenue losses. “Keeping the corporate rate competitive helps avoid ‘income shifting’ by multinational companies from high-tax to low-tax jurisdictions.”

Kevin Hassett at AEI has also just published his report card on corporate tax rates. The result? America gets an “F.”

He provides in-depth analysis that confirms Edwards’ main points. He also shows the effect on revenues. This about sums it up:

In 1981, the United States raised about 2.3 percent of GDP from corporate tax revenues, but between 2000 and 2004, it raised between 1.7 and 1.9 percent.

In a separate study, Hassett has shown how lower corporate tax rates will raise additional tax revenue.

He has also argued here at ConservativeHome that working class families are hit especially hard by the higher corporate rates, and that lowering them is the most effective strategy for helping middle class workers today.

Lawmakers are frozen right now when it comes to just about anything on which they can work together in a bipartisan way. Corporate tax reform seems about as low-hanging a piece of fruit right now one can find. Let's hope we can push our friends in Congress to act on it soon.

Comments

[Chris]

Most other industrialized nations have a very high income and at least some sort of national sales tax.

You can't cut one without raising the other. China is bound to run out of money sooner or later.