Cutting Corporate Taxes, Everywhere But Here

By July 13, 2007General

Today’s lead editorial in the Wall Street Journal, “We’re Number One, Alas.” (Paid subscription required):

Some good news on the tax cutting front: Last week lawmakers approved an 8.9 percentage point reduction in the corporate income tax rate. Too bad the tax cutters are Germans, not Americans.

There’s a trend here. At least 25 developed nations have adopted Reaganite corporate income tax rate cuts since 2001. The U.S. is conspicuously not one of them. Vietnam has recently announced it is cutting its corporate rate to 25% from 28%. Singapore has approved a corporate tax cut to 18% from 20% to compete with low-tax Hong Kong’s rate of 17.5%, and Northern Ireland is making a bid to slash its corporate tax rate to 12.5% to keep pace with the same low rate in the prosperous Republic of Ireland. Even in France, of all places, new President Nicolas Sarkozy has proposed reducing the corporate tax rate to 25% from 34.4%.

The Journal concludes that one sensible policy remedy for the United States would be to cut the 35 percent U.S. federal corporate tax rate to the industrial nation average of 29 percent. That suggestion runs closely along the lines of the NAM’s recommendations on tax policy made in our NAM white paper, “A 21st Century Tax Policy to Promote Job Creation and Economic Growth.” (You can download the white paper here as a .pdf file.)

The paper includes an extensive discussion of the salutory economic effects of reducing corporate tax rates, recommending a reduction to 25 percent.

There is strong evidence that reducing the corporate tax rate would lead to greater economic growth, higher wages for workers, an increase in productivity levels, more business investment and lower inflation.

Other countries — our competitors — have concluded the same thing and are acting accordingly. Will the United States?

Join the discussion One Comment

  • Tom Hopper says:

    As long as we’re talking statistics, we might at least ask what the correlation coefficient is on the Laffer curve that the Wall Street Journal shows. The Wall Street Journal’s graph certainly has a correlation coefficient well below 0.2, which means their Laffer curve has no predictive (or explanatory) power for the data given.

    Pulling the data off of the supplied graph and into Excel, I find that Excel’s simplistic “fit trendline” function comes up with an R^2 of 0.10 for a linear trendline and 0.18 for a parabola (second order polynomial). The parabolic fit actually fits the data better than the curve in the example above, because the fitted parabola lies within the data rather than above it. The difference here in R^2 value is probably not statistically significant, and in any case the corporate tax rate predicts less than twenty percent of the variance in tax revenues, meaning the corporate tax rate is nearly meaningless for understanding tax revenues. The only conclusion that we can draw is that below about 50% tax rates, increasing the tax rate increases government revenue from taxes.

    As a statistics example, I think this is a better example of chart-based encryption, masking the message of the data through poor design, to advocate a desired policy change rather than an example of using statistics to make data-driven decisions.

    As usual, Wikipedia has a nice article on the Laffer curve, and includes a link to the OMB’s own study on the impact of reducing corporate tax rates.

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