Despite a lingering effort to repeal and replace Obamacare, much of Washington’s political and media attention is already turning toward tax reform.
Democrats and their liberal allies are eager to sow discord among the GOP ranks in hopes of another failure. Meanwhile President Trump and House and Senate leadership are looking for a big win.
With that coming corporate tax fight in mind, I’d like to point your attention to some analysis by my friend, Cato Institute scholar Dan Mitchell.
Dan starts his discussion of lowering corporate rates with the idea that taxing something inevitably gets you less of it. Look at cigarette smoking for example, where punitive taxation has greatly reduced the number of smokers.
Then Dan applies that principle to corporate taxation, suggesting lower corporate tax rates could even generate more revenue in the long run. Dan writes:
America’s 35 percent corporate tax rate (39 percent if you include the average of state corporate taxes) is destructively high compared to business tax systems in other nations.
Last decade, the experts at the American Enterprise Institute calculated that the revenue-maximizing corporate tax rate is about 25 percent.
More recently, the number crunchers at the Tax Foundation estimated the long-run revenue-maximizing rate is even lower, at about 15 percent.
You can (and should) read their studies, but all you really need to understand is that companies will have a greater incentive to both earn and report more income when the rate is reasonable.
But since the U.S. rate is very high (and we also have very punitive rules), companies are discouraged from investing and producing in America. Firms also have an incentive to seek out deductions, credits, exemptions, and other preferences when rates are high. And multinational companies understandably will seek to minimize the amount of income they report in the United States.
In other words, a big reduction in the corporate rate would be unambiguously positive for the American economy. And because there will be more investment and job creation, there also will be more taxable income. In other words, a bigger “tax base.”
Read more from Dan here.