Want a 12 percent raise? Eliminate the Corporate Income Tax

by Jason Russell

Source: Economics 21

Rapid investment. Increased economic output. Gains in real wages and national savings. According to Laurence J. Kotlikoff, professor of economics at Boston University, these benefits could be realized if America would adopt one simple policy reform: elimination of the U.S. corporate income tax.

In a new paper Kotlikoff and his coauthors, Hans Fehr and Sabine Jokisch of the University of Wuerzburg and Ashwin Kambhampati of Oberlin College, conclude that the real wages of American workers would grow by 12 percent if the corporate income tax were fully eliminated. The economists developed a large-scale model to simulate how the U.S. economy would interact with other global economies under several different corporate tax reforms.  Their findings were published in December 2013 by the National Center for Policy Analysis in a paper entitled, “Simulating the Elimination of the U.S. Corporate Income Tax.

At 39.1 percent, the United States has the highest corporate tax rate in the developed world. It is more than 14 percentage points higher than the OECD average. President Obama and House Ways and Means Committee Chair Dave Camp have proposed a corporate income tax cut of at least ten percentage points, but Congress has not acted.

Kotlikoff’s study confirms that cutting, or even eliminating, the corporate income tax would help American workers. In the short-term, the simulation finds that unskilled U.S. workers would see a seven percent increase in real wages, while skilled workers would receive an eight percent increase. As time goes on, these increases grow to 12 percent for unskilled U.S. workers and 13 percent for skilled workers. While corporations would certainly benefit, the political left would be unable to claim corporate gains are coming off the backs of American workers.

Kotlikoff’s simulations measure the effect of corporate tax reform on multiple generations of American workers. Though uncertainty increases in the long-run, it is important to note Kotlikoff’s model even predicts significant gains for workers born in the year 2100.

If the U.S. cuts the corporate income tax, other nations would likely follow in order to maintain their economic competitiveness. Should this occur, economic gains would still follow due to the “dead-weight loss” from taxation. That means that tax collection is inefficient, and some of the value of the money collected is lost to administering the collection process and redistributing the funds. The authors write, “The major welfare gains to American cohorts, both skilled and unskilled, obtain even if the other regions in our model follow the U.S. lead and also eliminate their corporate income taxes.” Even if a “race to the bottom” on corporate income tax rates did transpire, Americans would still be much better off getting rid of the corporate income tax.

The corporate tax has its roots in the Progressive Era. The current iteration began in 1909 as a way to tax the rich until the 16th Amendment, allowing income taxation, could be ratified in 1913. Today, the corporate tax burden casts a wide net, harming not only the wealthy but hobbling the poor and vulnerable as well. Pension funds, mutual funds, and tax-deferred retirement accounts all hold corporate stock, and they greatly benefit the middle-class. As has happened with so many other taxes, what was once meant to soak the rich has come to disproportionately harm the rest of the country instead.

Economic efficiency would also increase if the corporate tax were abolished. A nation with no corporate income tax would not have businesses lobbying for tax loopholes. This would force companies to focus on competing in the marketplace instead of on Capitol Hill. When the incentive to lobby is decreased, companies put more resources into improving their products and cutting prices. 

Eliminating the corporate tax would level the playing field between capital-intensive companies and those with few write-offs. Capital-intensive companies can write off the cost of depreciating their capital, so their effective corporate tax rate is lower.  Companies without such write-offs pay the full 39 percent rate.

Businesses would also save on compliance costs from paying taxes. A simplified or nonexistent corporate tax code reduces the need to hire corporate tax accountants.

Kotlikoff’s case for abolishing the corporate income tax is so strong that the editors at the New York Times published an op-ed on his findings. Such simple reform would go so far in advancing the lives of Americans young and old, unskilled and skilled. Abolishing the outdated corporate income tax now would jumpstart the economy, spurring investment and growth in the labor force that is necessary for true recovery.