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Tuesday, August 2, 2016

US Now Lags 30 Years Behind in the Global Race to Abolish Corporate Tax

The United States has one of the highest statutory corporate tax rates in the developed world, and our productivity, deficit, and wages are suffering for it.

We heard in July that the federal budget deficit had risen to its highest level in 2 years. The widening deficit is said to be the result of weak corporate tax revenues and low productivity. Given that the conventional wisdom from progressive politicians is to increase tax rates to drive up tax revenue, why is it that the highest corporate tax rates in the OECD are reaping less revenues (as a percent of GDP) than low-tax economies?

The US has the highest statutory corporate tax rate in the developed world.At 35%, the United States has the highest statutory corporate tax rate in the developed world, and there have been no major reforms or reductions in the corporate tax rate since Ronald Reagan slashed the headline rate to 34%. Over the same period, the rest of the world has continued to lower rates to a global average of almost 22%.

As a result of the extortionately high corporate tax rates in the United States, so out of sync with the rest of the world, many American corporations choose instead to invest overseas and register their headquarters in low-tax countries. At the same time, a larger proportion of business income is now earned by pass-through entities, meaning these entities can forgo paying corporate tax all together. High rates of tax create perverse incentives for investors to keep their money out of the US whilst encouraging entrepreneurs to seek new avenues for avoiding paying the tax, or at least minimizing the rate at which they contribute.

A 1% increase in corporate tax rates leads to a 0.5% decrease in real wages.Corporate taxation in the Unites States has remained unchanged for so long because politicians find it useful to uphold as a “progressive” form of tax, ensuring corporations pay their “fair share.” However, the empirical research suggests that those who are hit hardest by higher corporate taxes are the workers, through wages suppression, and shareholders, who are essential for capital investment. A study in 2011 suggested that a 1% increase in corporate tax rates leads to a 0.5% decrease in real wages.

With low productivity being another important factor in the widening federal deficit, it would be wise to also note that high corporate tax rates have a severe adverse effect on capital investment and entrepreneurship, which is hardly a recipe for productivity and growth. A World Bank survey examining the effects of corporate tax rates on productivity in 42 developing countries found that both investment and productivity responded negatively to an increase in the corporate tax rate.

To sum up, the United States is a global loser in the race to abolish corporate tax. As a result, capital investment is lower, wages are suppressed, productivity is down, and the budget deficit continues to widen as corporate tax revenues become anemic. The evidence is clear: the costs of corporate tax are extremely damaging to everyone, not just corporations. Perhaps it’s time to time to join the global race in abolishing this outdated burden.

  • Jack Salmon is a research associate at the Mercatus Center.