This article originally appeared in Watchdog.
Tax cuts are a major feature of Republican presidential candidates’ economic policies, and it showed in last week’s debate.
But not all tax cuts are created equal. In particular, the drive to cut individual rates is misguided. In the tax code, the real culprit for sluggish economic growth is the corporate tax.
The United States has the highest corporate tax rate in the developed world—39 percent, when including an average of state levies. In the 1950s, high corporate taxes provided a sizeable chunk of federal government revenue—up to 32 percent in some years. But today, the tax makes up only about one tenth of federal government revenue.
What changed was that other countries realized that their high corporate tax rates were bad for international competitiveness. Over the last three decades, OECD nations cut their corporate tax rates by up to 75 percent. America only cut its rate by 22 percent.
Paradoxically, America’s higher corporate tax rate has lead to less revenue for the government. Pushed away by the high rate and our unique worldwide system of taxation—in which income earned anywhere in the world, not just America, is subject to tax—American companies are increasingly setting up subsidiaries in low-tax nations such as Ireland. The result is less money for federal programs and less investment in American industry.
That last point is key. Since capital is mobile, investors who will see a chunk of their returns eaten by the corporate tax will take their capital elsewhere, either overseas or into the non-corporate sector. To entice them back, American corporations must offer higher returns, which reduces the number of new investment projects they can justify. With less investment, economic growth lags.
One paper from the OECD found that of all types of taxation, corporate taxes are the most harmful for economic growth, more so than income taxes, consumption taxes, and property taxes.
Corporate taxes are especially bad for workers. While investors can move their money to where returns are higher, workers are less likely to escape to countries with higher wages. Companies will thus cut wages instead of shareholder returns to pay for the corporate tax. According to one study from researchers at NBER, 45 to 75 percent of the burden of the corporate tax falls on workers. Another, published by the Kansas City Federal Reserve, concluded that for every dollar of revenue reaped by the corporate tax, wages decline by $4.
To their credit, Republican candidates Jeb Bush and Marco Rubio have proposed cutting the federal corporate tax to 20 and 25 percent, respectively. But these candidates also include cuts to personal income taxes as a major component of their plans. Personal income taxes also harm economic growth by discouraging work, but corporate taxes are far worse. If revenue constraints force us to cut only one, it should be the corporate tax.
This might not be great politics, since the optics of taxing giant corporations are better than taxing individuals. But given the major boost to wages and employment that would follow from the abolition of the corporate tax, workers would come out ahead.
Voters should remember that those who nominally pay a tax are not always the same as those who bear the burden of it. When it comes to corporate taxation, it is the little guy who suffers.
Preston Cooper is a Policy Analyst at Economics21. You can follow him on Twitter here.
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