With
the Trump Administration moving towards lowering the corporate tax rate from
its current 35 percent, a look at a study by Jane Gravelle at the Congressional Research Service
is timely. As almost people are aware, Corporate America likes to
complain about the "uncompetitiveness" of the current rate
particularly when compared to corporate tax rates in other nations, a factor
that they claim is leading to slower economic growth in America. In the study by Ms.
Gravelle, she examines the impact of a 10 percentage point drop in the corporate
headline tax rate of 35 percent and how this impacts key economic factors
including corporate tax revenue, job creation and output.
There
are three types of corporate taxes as follows:
1.)
the statutory rate - the rate in the tax statute which, in the case of the
United States, is a maximum of 35 percent.
2.)
the effective rate - the tax rate paid divided by profits - this rate capture
the tax benefits that reduce the taxable income base relative to profits.
3.)
the marginal rate - the tax rate calculate from the share of pre-tax return
that is paid in taxes.
Additionally,
in the United States, corporations must pay income taxes at the state level
which raises the statutory rate to 39.2 percent from 35 percent.
Let's
look at a table which shows the various corporate tax rates for the United
States and its OECD peers:
As
you can see, the effective corporate tax rate in the United States is roughly
in line with its OECD peers. Several other studies show similar results
with U.S. effective corporate taxes being similar to those in the world's 15
largest economies including China and Brazil.
Here
is a table showing the historical statutory tax rates for the United States and
its OECD peers with the weighted column showing the average tax rate weighted
to the size of the economy:
Now,
let's look at the impact of a 10 percentage point decrease in the statutory
corporate tax rate in the United States, a move that would bring U.S. corporate
taxes into line with the weighted average of the OECD. Here are the most
significant impacts:
1.)
Tax Revenue - over a decade, corporate tax revenues would decline by between
$1.3 trillion and $1.7 trillion.
2.)
Economic Output and Wages - a one-time increase of approximately 0.62 percent
at the maximum. Some studies show that the impact on output and wages
could be as low as 0.18 percent.
It
is interesting to note that, even though corporate tax rates in the United
States are higher than in other jurisdictions, total corporate tax revenue as a
percentage of GDP has dropped substantially since the 1950s as shown here:
By
way of comparison, corporate taxes as a percentage of GDP is around the 3
percent level for other developed economies.
One
of the issues that seems to develop when the United States lowers its corporate
tax rate is that other jurisdictions follow the American lead. This was
the case in the period between 1986 and 1988 when the U.S. lowered its
corporate tax rate from 48 percent to 35 percent as shown on this graphic:
When
one nation cuts its corporate tax rate, it attracts capital from other nations,
however, if all nations cut their corporate tax rates, no nations gain capital
and all nations lose tax revenue.
As
you can see from this analysis, the idea of reducing corporate taxes in the
United States is far from a clear cut win for the U.S. economy. While
Corporate America loves to tout the advantages of a lower headline statutory
corporate tax rate, this analysis shows that the economy will gain very little
at the cost of much-reduced tax revenues. As well, in our "monkey
see, monkey do" world, other jurisdictions may simply follow the lead of
the United States, lowering their own corporate tax rates in a move to attract
business investment. The race to the bottom will clearly lead to a
situation where there are no winners except for the corporate world which will
see its profits expand.
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