Abolishing the Corporate Income Tax Could Be Good for Everyone

August 5, 2014

In a new paper for the National Center for Policy Analysis, Senior Fellow and Tax Analysis Center Director Larry Kotlikoff explains how abolishing the corporate income tax would benefit all American workers.

Many people may not realize that relatively little revenue is derived from the corporate income tax. In 2013, the tax took in $288 billion -- just 1.8 percent of gross domestic product. At the same time, the tax is a burdensome one, encouraging American corporations to operate overseas and keep their profits abroad, rather than reinvesting them back into the United States, where they face high taxes.

Companies would quit avoiding American taxes by moving abroad, explains Kotlikoff, if the United States (which boasts the highest corporate tax rate of all developed countries) reformed its tax code. Using a dynamic economic model, Kotlikoff was able to analyze the short and long-term economic impact of changing the corporate tax burden. First, he analyzed the effect of abolishing the corporate income tax entirely:

  • Capital stock would increase 23 percent to 37 percent.
  • Real wages would increase 12 percent to 13 percent.
  • The United States' gross domestic product would increase 8 percent to 10 percent.

The United States would still see positive effects from reducing the corporate tax from 35 percent to 9 percent and eliminating loopholes while imposing a small wage tax:

  • Both low- and high-skilled workers' wages would increase 6 percent in the short term and 9 percent over the long run.
  • GDP would increase by 6 percent immediately and permanently.
  • Capital stock would increase 17 percent in the short run, reaching 30 percent by 2040.

Most Americans see the corporate income tax as a tax that affects only businesses, but it is ultimately American workers that bear the burden of the tax. Eliminating the tax would eliminate the incentive for businesses to move and invest overseas, and workers would gain through significantly higher wages.

Source: Laurence J. Kotlikoff, "Abolishing the Corporate Income Tax Could Be Good for Everyone," National Center for Policy Analysis, August 5, 2014.

 

Browse more articles on Tax and Spending Issues