Thursday, June 05, 2008

Corporation taxes, growth and "tax incidence"

We would like to draw your attention to a new report from the Washington-based Center on Budget and Policy Priorities. Corporation tax rates in the U.S. are a hot political topic at the moment. The new report's key findings are as follows:

• Some advocates of cutting the corporate income tax rate have greatly exaggerated both the level of tax that U.S. corporations pay and the economic effects of the corporate income tax.

• While the statutory U.S. corporate tax rate is relatively high, effective corporate tax rates — the share of their profits that corporations actually pay in taxes — are much lower, due to the plethora of corporate tax breaks in the tax code.

• Effective tax rates also differ substantially among different types of investment. For example, some categories of corporate investment are taxed at rates close to the statutory rate, while debt-financed investment is subject to a negative effective marginal rate.

• These large discrepancies create opportunities for revenue-neutral or revenue-raising tax reforms that could benefit the economy by leveling the playing field for different types of investment and thereby removing economic distortions that the current tax code creates.

• The evidence does not support claims that unpaid-for (i.e. deficit-financed) corporate tax cuts would significantly benefit the economy. In fact, a Joint Committee on Taxation analysis found that such tax cuts would actually slightly reduce economic growth over the long run.

• Because deficit-financed tax cuts eventually would have to be paid for (through reductions in programs or increases in other taxes), they would probably leave most Americans worse off even if they generated small economic gains.

This report is timely, given a recent opinion piece in the New York Times about corporation taxes by Greg Mankiw, former chairman of George W. Bush's Council of Economic Advisers. His arguments - effectively a sophisticated lobbying endeavour in favour of corporate tax cuts, are almost entirely bogus. Richard Murphy (who received an early birthday present yesterday) has already commented at some length on this argument, which is sometimes known as the "tax incidence" argument. We will be turning to these matters arguments very shortly: probably in the next few days. Watch this space. In the meantime, take a look at what the top economist Brad deLong had to say about Mankiw's piece.


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