The Economic Effects of Adopting the Corporate Tax Rates of the OECD, the UK and Canada
August 26, 2015
America's tax rate at 35% is the highest in the industrialized world. This high corporate rate is at the root of many of the problems lawmakers are trying to address through programs such as the "innovation box" which would lower the tax rate on patents and intellectual property.
Decreasing the tax rate could bring many benefits: it would improve competitiveness, lower the cost of capital, boost economic growth and benefit American workers through higher wages. The main obstacle is the cost to the Federal Treasury in the form of reduced revenues but these costs are offset once the benefits of economic growth are factored into the equation.
Tax Foundation economists conducted a study to simulate the effects of three different lower tax rates:
- 25%, matching the OECD average.
- 20%, matching the UK corporate tax rate.
- 15%, matching the Canadian federal tax rate.
The results revealed that if the U.S. were to adopt the Canadian rate, long-term GDP would grow by 4.3% which is nearly double than if it were to adopt the OECD average. By contrast, if the U.S. adopted the UK rate, GDP would still grow by 3.3%.
The main reason for this additional growth is the reduction in the service price of capital which are costs associated with investment, such as taxes, depreciation, risk, and foregone consumption opportunities. The lower capital costs would in turn increase the size of the capital stock in the economy.
The author concludes that the effects of a lower corporate tax rate would translate into better wages and more jobs, rising living standards for families at all income levels, and lastly economic growth would temper the effects of less federal tax revenues.
Source: Scott A. Hodge, "The Economic Effects of Adopting the Corporate Tax Rates of the OECD, the UK, and Canada," Tax Foundation, August 20, 2015.
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