The way to grow the economy is to cut taxes. Last night in the State of the Union address President Obama said he wanted to close tax loopholes which is another way of saying that he is not through raising taxes yet.
The Laffer Curve Strikes Again: Revenues Falling in Spite of (or Perhaps Because of) Spain’s Punitive Corporate Tax Rate
October 3, 2012 by Dan Mitchell
I’ve shared evidence from around the world (England, Italy, the United States, and France) and from various states (Illinois, Oregon, Florida,Maryland, and New York) to argue that it is foolish to ignore the Laffer Curve.
Not that it makes any difference. I’m slowly coming the conclusion that my friends on the left will never learn – in large part because they’re more interested in punishing success with class warfare tax policy than they are in collecting extra revenue for government.
But surely there are some statists who are motivated by emotions other than spite, so I refuse to give up. Let’s look at some evidence from Spain to further confirm that high tax rates aren’t necessarily the way to maximize tax revenue (this also is a story showing that tax competition between nations is a good way of disciplining governments that are too greedy, but that’s another issue).
Here are some details from a CNBC report.
Spain’s corporate tax take has tumbled by almost two thirds from pre-crisis levels as small businesses fail and a growing number of big corporations seek profits abroad to compensate for the prolonged downturn at home. …Spain has a headline corporate tax rate of 30 percent, broadly in line with other large European economies. Switzerland, however, has a headline rate of 8.5 percent, and lawyers say deductions can be made to reduce this further. “A fundamental right of EU law is the freedom of establishment. All companies and taxpayers look after their tax affairs, and if they can pay a lower rate somewhere else, it’s better for their business and natural that they would do so,” a global tax lawyer based in Spain said. …Rajoy did eliminate some corporate tax breaks in 2012, a policy he will continue in 2013, and has also brought forward some tax payments, though that could be storing up problems.
Much of the decline in corporate tax revenue can be attributed to Spain’s dismal economy, of course, which has been exacerbated by a bunch of tax hikes imposed by a supposedly right-of-center government.
The one tax rate that hasn’t been increased, though, is the top rate of corporate tax. So how can this be a story about the Laffer Curve?
Well, sometimes standing still is a recipe for defeat. And sometimes moving in the right direction isn’t enough when everybody else is going in the right direction at a faster rate.
Here’s a chart showing changes in the average EU corporate tax rate compared to Spain’s corporate tax rate.
Spain’s corporate tax rate has dropped by five percentage points. That’s progress, but other nations have moved more rapidly in the right direction. Back in 1995, the Spanish corporate rate was slightly lower than the EU average. Now it’s noticeably higher.
And as the excerpt above notes, there are nations such as Switzerland that have far lower tax rates and much better fiscal policy.
To be sure, Spain’s main challenge is the need to dramatically reduce the burden of government spending. That will help long-run growth because more resources will be allocated by private markets.
But Spain also should seek an immediate boost to growth by reducing tax rates on productive behavior. A lower corporate tax rate should be part of the answer.
I got to hear Arthur Laffer speak back in 1981 and he predicted what would happen in the next few years with the Reagan tax cuts and he was right with every prediction. The Laffer Curve Wreaks Havoc in the United Kingdom July 1, 2012 by Dan Mitchell Back in 2010, I excoriated the new [...]
Raising taxes will not work. Liberals act like the Laffer Curve does not exist. The Laffer Curve Shows that Tax Increases Are a Very Bad Idea – even if They Generate More Tax Revenue April 10, 2012 by Dan Mitchell The Laffer Curve is a graphical representation of the relationship between tax rates, tax revenue, and [...]
Dan Mitchell: “Romney is Right that You Can Lower Tax Rates and Reduce Tax Preferences without Hurting the Middle Class”
The Laffer Curve, Part I: Understanding the Theory Uploaded by afq2007 on Jan 28, 2008 The Laffer Curve charts a relationship between tax rates and tax revenue. While the theory behind the Laffer Curve is widely accepted, the concept has become very controversial because politicians on both sides of the debate exaggerate. This video shows [...]
If we want the economy to grow then we should look closely at a flat tax. A Primer on the Flat Tax and Fundamental Tax Reform August 11, 2012 by Dan Mitchell In previous posts, I put together tutorials on the Laffer Curve, tax competition, and the economics of government spending. Today, we’re going to look [...]
President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here. I got [...]
I have written a lot about this in the past and sometimes you just have to sit back and laugh. Laughing at Obama’s Bumbling Class Warfare Agenda July 13, 2012 by Dan Mitchell We know that President Obama’s class-warfare agenda is bad economic policy. We know high tax rates undermine competitiveness. And we know tax increases [...]
President Obama c/o The White House 1600 Pennsylvania Avenue NW Washington, DC 20500 Dear Mr. President, I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here. If our [...]