NCPA - National Center for Policy Analysis


June 3, 2008

Sen. John McCain (R-Ariz.) wisely proposed reducing the corporate tax rate from 35 percent to 25 percent.  High corporate tax rates lead to low returns on capital, lower wages, or higher prices -- or all three, says , says N. Gregory Mankiw, a professor of economics at Harvard University. 

For example:

  • In a 2006 study, the economist William C. Randolph of the Congressional Budget Office (CBO) concluded that domestic labor bears slightly more than 70 percent of the burden from the tax.
  • A recent Oxford University study examined data on more than 50,000 companies in nine European countries and concluded that a substantial part of the corporation income tax is passed on to the labor form in the form of lower wages; in the long-run, a $1 increase in the tax bill tends to reduce real wages at the median by 92 cents.
  • A CBO report in 2005 concluded that the distortions that the corporate income tax induces are large compared with the revenues that the tax generates.

In 2007, corporate taxes brought in $370 billion, representing 14 percent of federal revenue.  Cutting the tax rate to 25 percent would cost the Treasury about $100 billion a year.  A decrease in the corporate tax would lead to increased economic growth, which tends to raise tax revenue from all other tax sources, says Mankiw:

  • To the extent that shareholders would benefit, they would pay higher taxes on dividends, capital gains and withdrawals from their retirement accounts.
  • To the extent that workers would benefit, they would pay higher payroll and income taxes.

A recent study by the American Enterprise Institute examined data from countries in the Organization for Economic Cooperation and Development and found that these effects are strong enough to make a corporate rate cut self-financing.

Source: N. Gregory Mankiw, "The Problem With the Corporate Tax," New York Times, June 31, 2008.

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