Several blogs are discussing the article in Friday’s Wall Street Journal on how basically the entire world, with the notable exception of the United States, is reducing corporate income tax rates.
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. At least 25 developed nations have adopted Reaganite corporate income tax rate cuts since 2001. The U.S. is conspicuously not one of them. All of which means that the U.S. now has the unflattering distinction of having the developed world’s highest corporate tax rate of 39.3%.
Not to mention the vast majority of the developing eastern Europe and Asian economies.
What do politicians in these countries understand that the U.S. Congress doesn’t? Perhaps they’ve read "International Competitiveness for Dummies." In each of the countries that have cut corporate tax rates this year, the motivation has been the same — to boost the nation’s attractiveness as a location for international investment.
Basically they know about the dynamics of the Laffer Curve. Lower corporate tax rates lead to more, not less, tax revenue from business. As a very partial excuse for the short-sighted lovers of taxation,
it is somewhat counterintuitive. Until you dig deeper, and that’s today’s "fun with statistics." On the graph on the right, note how Ireland receives a higher percentage of GDP in tax revenue with much lower tax rates. And keep in mind that several of the countries on the right side of the curve, such as France, are aggressively reducing corporate tax rates.
As tax rates go up, the incentive to find and exploit loopholes goes up. If the tax rate gets high enough, companies shift more operations overseas. And if they continue to go up, such as the current Senate thinking about raising taxes on foreign-source income, those companies then move their corporate headquarters abroad. Already the number of major corporations relocating overseas has reached record levels, and even Microsoft occasionally threatens to move a few miles north to Canada.
But the impact doesn’t end with high tax rates creating lower tax revenue and driving companies offshore.
For all the talk of "tax equity," this is also a recipe for further inequality by driving more capital offshore. Research has shown that high corporate tax rates reduce the rate of increase in manufacturing wages. For that matter, most economists understand that corporations don’t ultimately pay any taxes. They merely serve as a collection agent, passing along the cost of those taxes in some combination of lower returns for shareholders, higher prices for customers, or lower compensation for employees. In other words, America’s high corporate tax rates are an indirect, but still damaging, tax on average American workers.
And guess what… there’s also an almost identical Laffer Curve for individual taxes. The more the government taxes, the more income is shifted, moved, hidden, and sometimes just not realized. So as we’re fighting to remain competitive through the implementation of lean manufacturing and other methods, tax policy is making some companies ask "why bother?" and simply move overseas. As the WSJ concludes,
One immediate policy remedy would be to cut the 35% U.S. federal corporate tax rate to the industrial nation average of 29%. That’s probably too sensible for a Congress gripped by a desire to soak the rich and punish business, but a Democrat who picked up the idea could turn the tax tables on Republicans in 2008. Meantime, as the U.S. fails to act, the rest of the world is looking more attractive all the time.
And that’s today’s edition of fun with statistics!
Larry Thorsen says
Great… So the Democrats still don’t have a clue about Economics 101 and the Republicans have abandoned any economic growth initiatives so they can focus on supposedly more important global issues like gay marriage. Doesn’t sound too hopeful for our future.
Tom Hopper says
As long as we’re talking statistics, we might at least ask what the correlation coefficient is on the Laffer curve, above. The Wall Street Journal’s graph, above, 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 into Excel, I find that Excel’s simple “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.
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.