NCPA - National Center for Policy Analysis

Corporate Tax Rate Is Major Barrier to Economic Growth

March 1, 2011

The U.S. effective corporate tax rate on new investment was 34.6 percent in 2010, which was the highest rate in the Organization for Economic Cooperation and Development (OECD) and the fifth-highest rate among 83 countries.  "Effective" tax rates take into account statutory rates plus tax-base items that affect taxes paid on new investment, such as depreciation deductions, inventory allowances and interest deductions.  The average OECD rate was 18.6 percent and the average rate for 83 countries was 17.7 percent, according to a new report from the Cato Institute by Duanjie Chen and Jack Mintz of the University of Calgary, School of Public Policy.

  • A growing number of policymakers are recognizing that the U.S. corporate tax system is a major barrier to economic growth.
  • The aim of corporate tax reforms should be to create a system that has a competitive rate and is neutral between different business activities.
  • A sharp reduction to the federal corporate rate of 10 percentage points or more combined with tax base reforms would help generate higher growth and ultimately more jobs and income.
  • Such reforms would likely lose the government little, if any, revenue over the long run.

State governments also play an important role in business tax policy.  Unfortunately, the average state corporate tax rate has not been cut in at least three decades, despite major reductions around the world since then.  Furthermore, state retail sales taxes impose substantial burdens on capital purchases, which undermine investment and productivity.  Thus, sales taxes should be reformed to remove taxation on business inputs.

Source: Duanjie Chen and Jack Mintz, "New Estimates of Effective Corporate Tax Rates on Business Investment," Cato Institute, February 2011.

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