The case for corporate income tax cuts

Because they contribute to capital flight, high corporate tax rates lower government revenue. With increasing capital mobility, multinational firms respond to higher taxes by moving activities to lower tax jurisdictions. This capital flight means fewer taxes are paid domestically. In fact, governments frequently find that at a higher rate the tax actually raises less revenue. This finding adds support for the Laffer Curve, says Mehreen Younis, a research assistant with the National Center for Policy Analysis.

The insight behind the Laffer Curve is that if a tax rate is high, a government can raise the same amount of revenue (or more) by lowering the tax rate. Most countries have found that tax revenues rise following cuts in their corporate tax rates. For example:

The average corporate income tax rate worldwide fell from 46 per cent to 33 per cent between 1982 and 1999, while corporate income tax collections rose from 2.1 per cent to 2.4 per cent of national income, reports the Cato Institute.

Similarly, the average corporate tax rate in 19 Organisation for Economic Co-operation and Development (OECD) countries fell from 45 per cent in 1985 to 29 per cent by 2005, while corporate tax revenues soared from 2.6 per cent to 3.7 per cent of gross domestic product (GDP).

Over the 2000 to 2005 period, according to the U.S. Treasury Department, average corporate income tax revenue as a percentage of GDP was one-third greater in OECD countries (3.4 per cent) than in the United States (2.2 per cent).

The revenue-maximising corporate tax rate in developed countries was about 34 per cent in the late 1980s and has declined steadily to about 26 per cent in recent years, estimate Alex Brill and Kevin Hassett of the American Enterprise Institute (AEI). Thus, at 39.25 per cent, the U.S. corporate tax rate is not only high but also inefficient in producing revenue, says Younis.

Source: Mehreen Younis, The Case for Corporate Income Tax Cuts, National Center for Policy Analysis, Brief Analysis No. 633, September 29, 2008.

For source: http://www.ncpa.org/pub/ba/ba633/ba633.pdf

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

FMF Policy Bulletin/ 07 October 2008