Saturday, December 6, 2008

Cutting our corporate tax rate is a no-brainer stimulus plan

The Tax Foundation produced this chart and it speaks for itself. How hard is it to understand that in order for U.S. business to be competitive in the world, we need to cut corporate tax rates? Cutting the corporate tax rate is a stimulus measure that can take effect almost instantly, whereas it will take many months and years for Obama's infrastructure spending/stimulus to take effect.

HT: Mark Perry

10 comments:

Mark Gerber said...

Hi Scott,
Looking at this chart, it does indeed seem a no brainer for the USA to lower its corporate tax rate. I had arrived at the same conclusion, and McCain made it part of his plaform. However, the opponents say that the USA corporate tax rate presented on this chart is a distortion because of the myriad deductions, credit, exemtption, etc. that our tax code offers accountants preparing corporate tax returns. So, I am wondering, is your chart a true apples-to-apples comparison, or would considerations of deductions shift it?

Scott Grannis said...

Deductions and such reduce the average corporate tax rate paid, but the important thing is indeed reflected correctly in the chart: on the margin, the corporate tax rate here is far above the rates elsewhere. What matters most is always the marginal tax rate.

It would make sense to reduce deductions at the same time as reducing the corporate tax rate. Zero deductions should be the goal. The existence of deductions just creates distortions in the economy and thus reduces economic efficiency.

Gene Prescott said...

US "business" tax rates could encompass a blend of "C" Corporations; "S" Corporations; and LLCs. I've read that S Corps and LLCs now account for a significant portion business income. The tax rate for those are whatever the marginal rate of the individual's 1040 is. I would expect the average rate to be some more than the 40% shown for businesses on the chart. I don't know a straight-forward way of getting to the actual data.

waterlooen said...

Bill Gross presents a chart showing actual tax payments divided by profits at http://www.allianzinvestors.com/commentary/mgr_billGross12012008.jsp. He also makes some very good points - essentially that equity valuations are indeed cheap based on the economic model of the recent past, but may not be so cheap in the new model - i.e. one with government playing such a big role and dampened private risk taking.

Scott Grannis said...

waterlooen: I would counter by saying that equity prices are incredibly cheap because the market is already pricing in all the bad stuff that Gross is worried about.

What if someone in the Obama administration gets smart and decides that cutting taxes is at least as good as increasing government spending as a way to stimulate the economy? They've already decided to foregoe higher taxes and are no longer worried about the deficit.

Another thing: there is a powerful trend all over the world to cut corporate taxes. Tax competition is a wonderful thing, and it will make it very hard for the incoming administration to buck the trend.

Corporate taxes in the latest fiscal year were about $300 billion, which is small compared to the spending plans being tossed around. Even if corporate taxes were only cut in half, the impact on the deficit would be minimal but the potential positive impact on the economy could be huge.

Gross is a pessimist, and so is the market. I think it pays to be an optimist these days.

Mark Gerber said...

Scott,
What do you make of Gross's corporate tax chart that shows the effective corporate tax rate has been running about 25% in recent years?

If Gross's caclulations are correct, our net corporate tax rate is in line with other countries. I agree that it would be better to get to this rate without the morass of deductions and such, but if the effective rate is 25%, are we in the ballpark of the other countries in your chart?

Thanks,
Mark

Scott Grannis said...

Mark: even if our average corporate tax rate is in the same ballpark as the average rate in other countries (and I'm not sure what that is, since I'm unfamiliar with how significant their deductions are), I would still contend that it is a bad thing that our marginal tax rate is much higher than their marginal tax rate. Everything important happens at the margin, after all. Not everyone has the significant deductions; at least some portion of the corporate population must contend with our higher marginal rate.

dave said...

Hi Scott,
This is what happens when tax policy is debated from a fairness perspective. People judge our tax policy based on how it compares to some other countries tax policy. In this country we have freedom of speech, should we clamp down on this freedom because some other countries may be less free than we are?

Who pays corporate taxes anyway? Aren't they incorporated into the price of products? We don't need to cut the corporate tax rate , we should eliminate it. The small amount of revenue it produces compared to the cost of compliance can't be justified . A considerable amount of Money is funneled every year into figuring out how to reduce taxes by corporations, this is just so much wasted capital and energy.
If the corporate tax was eliminated companies would by definition have more capital available to them, be able to be more price competitive in the global market and not have the enormous distraction that comes from trying to hide your profits from the tax man.

I think this just might increase their ability to grow their businesses which would provide more jobs and create more wealth?

Best regards,
Dave Cribbin

Scott Grannis said...

dave: you are absolutely correct. The corporate tax rate should be zero, no question.

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