NCPA - National Center for Policy Analysis

Obama Should Cut the Corporate Tax Rate

November 29, 2010

If Obama and his advisors are looking for a Clintonesque opportunity to move back to the center in a way that would make a real difference to the economy, he should partner with Republicans to cut the corporate tax rate and reform how we tax the foreign profits of U.S. companies.  The evidence suggests that such reforms would not only be good for the long-term growth of the economy, but would improve workers' wages and living standards over time, says Scott A. Hodge of Forbes magazine.

A dramatic cut in the corporate tax rate could be the best tonic for the ailing economy.

  • Next to Japan, the United States imposes the highest corporate tax rate of any industrialized country at nearly 40 percent (combining the federal and state rates).
  • A 2008 report by economists at the Organization for Economic Cooperation and Development (OECD) determined that the corporate income tax is the most harmful tax for long-term economic growth.
  • High personal income taxes were found to be the second-most harmful tax for long-term growth, which would argue for not allowing the Bush cuts to expire on the "rich" as President Obama proposes.
  • The least harmful taxes for growth, according to OECD economists, are consumption taxes and property taxes.

Economic research also finds that because capital is mobile but workers are not, labor bears a disproportionate share of the economic burden of corporate taxes -- as much as 70 percent by some estimates.  Economists such as Kevin Hassett at the American Enterprise Institute have found that workers in countries that have cut their corporate rates have seen faster growth in wages than workers in countries that have not cut their corporate taxes.  (A recent Tax Foundation study found a similar relationship in our 50 states).

Thus, Obama can legitimately sell a deep corporate rate cut as being prolabor because not only will it lead to an increase in wages and living standards, it will most likely lead to an increase in jobs because America will be a more attractive place for inbound investment, says Hodge.

Source: Scott A. Hodge, "Obama Should Cut the Corporate Tax Rate," Forbes, November 22, 2010.

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