I
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Evidence for Lower Corporate Tax Rates, Part I
Here is the argument why corporate tax rates should be as low as possible.
High corporate tax rates discourage investment.- Less investment reduces worker productivity.
- Lower rates of productivity result in lower wages.
In an ideal world, there would be no corporate income tax (or any income tax).
But I’ll gladly accept any movement in the right direction, which is why the reduction in the corporate tax rate was the crown jewel of Trump’s 2017 tax plan.
The bad news is that Biden wants to undo much of that progress.
Today, let’s look at some new academic evidence on the issue. A new study from the National Bureau of Economic Research, a
We use…post-WWII U.S. data on output, taxes, productivity and R&D spending to estimate the dynamic effects of income tax changes…and focus on personal and corporate income tax changes separately. …In Figure 1, we present our first set of main results. The figure contains two columns. On the left, we show the IRFs to a reduction in the average corporate tax rate. On the right, we show the results for a reduction in the average personal tax rate. …The first row in Figure 1 reveals that, following a shock to corporate and personal income taxes,
the average tax rates decline temporarily. …The second row in Figure 1 shows the impulse response functions for the percentage response of real GDP. … Looking at the first column it is clear that, despite the transitory nature of the corporate tax reduction, there are very persistent effects on real GDP, whose short-run increase of 0.5% persists throughout the ten year period shown in the figure. In other words, the corporate income tax cut has disappeared after 5 years, but the effect on the level of economic activity is still sizable and significant after 8 years. …A similar picture emerges for productivity, as shown in the third row of Figure 1. Both tax rate cuts boost productivity on impact, with the size of the initial response to a personal income tax cut being much larger than for a cut to corporate taxes. On the other hand, the effects of corporate tax cuts grow over time and remain significant even after 10 years.
Here’s the aforementioned Figure 1 from their research.
I’ll conclude by noting that permanent tax cuts are much better than temporary tax cuts.
But if taxes are being cut, regardless of duration, the goal should be to get the most bang for the buck. And there’s plenty of evidence (from the United States, Australia, Canada, Germany, and the United Kingdom) that lowering corporate tax rates is a smart place to start.
P.S. It’s unfortunate that Biden wants a higher corporate tax burden in the United States. It’s even more disturbing that he wants a global tax cartel so the entire world has to follow in his footsteps. But he apparently does not understand the topic.
I have put up lots of cartoons from Dan Mitchell’s blog before and they have got lots of hits before. Many of them have dealt with the economy, eternal unemployment benefits, socialism, Greece, welfare state or on gun control.
Concerning the French overspending problem Dan Mitchell states, “There are obvious lessons from Europe for the United States. If politicians don’t reform entitlement programs, we’re doomed to have our own fiscal crisis at some point in the not-too-distant future.”
This is very true. President Obama has overspent so much that our national debt will double under him and it will ruin our future. WHO WILL WE SEND OUR BILL TO? GERMANY WILL NOT PAY IT.
Some French Economic Humor
May 11, 2012 by Dan Mitchell
Having written several times about crazy French statism, you will understand why I like this cartoon.
Though, to be fair, France hasn’t gotten to the point where it’s being bailed out (it’s probably just a matter of time).
If you want some good analysis of the situation in Europe, Veronique de Rugy of the Mercatus Center hits the nail on the head in her column in today’s Washington Examiner.
France has yet to cut spending. In fact, to the extent that the French are frustrated with “budget cuts,” it’s only because the increase in future spending won’t be as large as they had planned. The same can be said about the United Kingdom. Spain, Italy and Greece have had no choice to cut some spending. However, in the case of these particular countries, the cuts were implemented alongside large tax increases. …This approach to austerity, also known in the United States as the “balanced approach,” has unfortunately proven a recipe for disaster. In a 2009 paper, Harvard University’s Alberto Alesina and Silvia Ardagna looked at 107 attempts to reduce the ratio of debt to gross domestic product over 30 years in countries in the Organisation for Economic Co-operation and Development. They found fiscal adjustments consisting of both tax increases and spending cuts generally failed to stabilize the debt and were also more likely to cause economic contractions. On the other hand, successful austerity packages resulted from making spending cuts without tax increases. They also found this form of austerity is more likely associated with economic expansion rather than with recession. …While the debate over austerity continues, the evidence seems to point to the conclusion that austerity can be successful, if it isn’t modeled after the “balanced approach.” It’s a lesson for the French and other European countries, as well as for American lawmakers who often seem tempted by the lure of closing budget gaps with higher taxes.
This is similar to my recent analysis, and Veronique also is kind enough to cite my analysis of how the Baltic nations have done the right thing and cut spending.
There are obvious lessons from Europe for the United States. If politicians don’t reform entitlement programs, we’re doomed to have our own fiscal crisis at some point in the not-too-distant future.
Only there won’t be anybody there to bail us out.
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