Corporate tax war

December 19, 2007

Free Market Foundation

A cut in the corporate tax rate would give a lift to the U.S. economy when it really needs it, according to a study by the National Bureau of Economic Research (NBER).

According to the authors:

High business taxes were found to reduce a nation’s domestic capital investment, the amount of foreign investment into that country, and its overall growth in gross domestic product (GDP).

Additionally, corporate taxation reduces the return on capital and thus discourages investment and reduces the cash flow of the firm in such a way as to reduce the after-tax capital available for reinvestment.

Also, high corporate levies reduce entrepreneurship, which drives new industries and job growth.

The clear implication is that raising the U.S. personal income tax rates would also stunt small business entrepreneurship. Yet most in the media and many politicians so far refuse to acknowledge that America is far behind the rest of the world in reducing corporate tax rates:

Among developed nations, the U.S. corporate income tax rate is the world’s second highest after Japan’s.

Even a proposed reduction by Rep. Charlie Rangel (D-N.Y.) would leave the United States well above the Organization for Economic Co-operation and Development (OECD) average of 25 per cent.

In recent years, Germany, France, the United Kingdom, Vietnam, Poland and Singapore, among many other nations, have either cut or proposed to cut their business tax rates.

The NBER research suggests continually high rates could discourage hundreds of thousands of small businesses from being formed in the next few years in the United States. Additionally, lower rates elsewhere will attract more investment and capital, and pose a threat to America’s economic competitiveness if Washington fails to act.

Source: Editorial, Corporate Tax War, Wall Street Journal, December 4, 2007.

For text: http://online.wsj.com/article/SB119673397691112663.html

For more on Taxes: http://www.ncpa.org/sub/dpd/index.php?Article_Category=20

FMF Policy Bulletin/ 11 December 2007