Reform the Corporate Income Tax

May 28, 2013

The U.S. tax code is upwards of 60,000 pages long. The tax code is convoluted in nature and is in need of reform. One area in need of drastic reform is the corporate income tax. The U.S. corporate income tax is one of highest in the world. The current corporate tax rate should be replaced with a low-rate flat tax on the broad base of business value added, says economist Arthur B. Laffer.

  • The United States has the highest statutory tax rate in the Organization for Economic Cooperation and Development at 35 percent.
  • In turn, you won't be surprised that U.S. federal corporate tax revenue as a share of gross domestic product is one of the lowest in the world at 1.2 percent in 2011.
  • U.S. corporate profits held abroad (i.e. not repatriated) add up to over $1.5 trillion and are growing at about $250 billion annually.

In 1986, the Reagan administration implemented tax cuts that dropped the highest corporate income tax rate from 46 percent to 34 percent. This created substantial economic growth and increased revenue for the government. But how could revenue increase for the government while the percentage at which the government taxed decreased? According to the economic theory of the Laffer Curve:

  • The higher a tax rate is, the more likely an increase will actually reduce tax revenues.
  • Likewise, the narrower the tax base, the more likely an increase in the tax rate applied to that base will reduce, rather than increase, tax revenues.
  • When the government lowers taxes at a rate that does not incentivize evasion, it increases revenues because people pay their taxes instead.

A low-rate flat tax on the broad base of business value added, with minimal deductions, exemptions, exclusions or loopholes, would collect baseline revenues while decreasing the economic growth impediment the least. A low tax rate would give businesses little incentive to evade taxes or avoid taxable income.

Source: Arthur B. Laffer "The U.S. Corporate Tax Code: Ripe for Bipartisan Reform," Pacific Research Institute, May 2013.

 

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