CORPORATE TAX LAFFER CURVE
November 14, 2007
The Laffer curve illustrates the idea that above a certain tax rate, cuts to the rate cause the tax base to expand sufficiently for revenues to increase. At 35 percent, the U.S. corporate tax rate seems to be above that rate, and thus in a strong Laffer zone, says Chris Edwards, Director of Tax Policy Studies at the Cato Institute.
The U.S. statutory rate is the second highest of the 30 nations in the Organization for Economic Cooperation and Development (OECD), and by one estimate, the effective rate is the highest, yet U.S. corporate tax revenues as a share of gross domestic product (GDP) are below average.
Economists Alex Brill and Kevin Hassett looked at these relationships in the OECD for 1980 to 2005:
- They found that increases to corporate tax rates in the OECD above 26 percent tended to reduce government revenues.
- The U.S. corporate tax rate is 14 percentage points above that rate, and thus probably far into the Laffer zone.
In another recent study Jack Mintz found similar results for Canada using a sample of OECD countries:
- He calculated that the revenue-maximizing corporate tax rate is about 28 percent.
- Note that the revenue-maximizing tax rate is falling as globalization continues to intensify.
A modest corporate tax rate cut would likely result in no government revenue losses in the long-term. However, the goal of policy should be to maximize growth, not revenues, and thus a much larger rate cut is in order. Edwards suggests cutting the corporate tax rate to 15 percent within a major overhaul of the tax code. That wouldn't quite match Ireland's 12.5 percent corporate rate, but it would reduce tax avoidance, make the United States a premier location for international investment, and supercharge American growth and innovation.
Source: Chris Edwards, "Corporate Tax Laffer Curve," Cato Institute, Tax & Budget Bulletin No. 49, November 2007.
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