More Evidence for a Corporate Rate Cut

Glenn Hubbard, the former chairman of the Council of Economic Advisers, comments in a Wall Street Journal column ($) that the corporate income tax hurts workers. He cites recent research showing that a lower corporate tax rate would have a substantial Laffer Curve effect.

As explained in a recent Tax & Budget Bulletin, the rest of the world is moving toward lower tax rates. The longer U.S. policy makers wait to implement similar reforms, the larger the losses for American workers:

[T]he tax may be borne not entirely (or even principally) by owners of capital, but by workers. Globalization plays a role. In an open economy, with mobile capital, a source-based tax like the corporate tax will lead to a capital outflow, reducing investment and productivity and wages.

…In other research assuming that the world-wide capital stock is fixed, William Randolph of the Congressional Budget Office finds that labor bears about 70% of the corporate tax. …A recent paper by Kevin Hassett and Aparna Mathur of the American Enterprise Institute analyzes data across countries and over time, concluding that for countries that are part of the Organization for Economic Cooperation and Development (OECD), a 1% increase in corporate tax rates results in a 0.8% decrease in manufacturing wage rates.  …A recent survey and study by KPMG shows, for example, that competition for investment continues to drive down tax rates around the globe, with further cuts in the pipeline from China, Germany, Singapore and Britain, among others. The desire for these cuts comes in part from the significant responsiveness both of real investment and taxable income to corporate tax rates. …Recent research by Michael Devereux of the University of Warwick suggests, though, that the revenue-maximizing corporate tax rate in OECD countries is likely less than 30%. That is, higher corporate investment (and subsequent corporate profits and corporate tax revenue) and shifts in taxable income by multinational firms will substantially reduce the revenue “cost” of a corporate rate cut from the present 35% to, say, 30%.

Cutting the corporate tax rate would be positive for investment, productivity and economic growth. It would also reduce a tax burden now borne in large part (or even entirely) by labor, bolstering wages. And business responses to the tax cut will offset much of the “static” revenue cost.