Friday, June 14, 2013

Do corporate taxes destroy growth? Here's some new evidence.

Many politicians and accountants and lobbyists and, occasionally, economists, assert that high taxes discourage savings and investment and kill growth.

But is this actually true? What does the evidence say?

It's fair to say that the evidence shows that high taxes don't kill growth. For instance, high-tax countries grow just as fast (or slowly) as low-tax ones in the long run - though it should be noted that the low-tax ones seem to suffer the penalties of higher inequality and greater risk of economic crisis, with no consequent growth benefit. See, for example, this post looking at evidence compiled by the Financial Times, which concluded:
"There is no relation between the share of government revenue and the rate of growth of real output per head. . . It is even quite surprising that such a spread [of the average tax ratio, from 29 percent of GDP in Japan to 55 percent in Sweden] seems to have no effect on economic performance."
Or take our blog in April looking at evidence from Prof. Chris William Sanchirico of Penn Law School and the Wharton School, which concluded that:  

"it would not be unreasonable to conclude, based on the best available theory and data, that the growth argument has no real basis."
Or see this, showing that higher-taxed U.S. states tended to outperform or match lower-taxed states and are better able to weather downturns; or this, on tax 'competition' between states, or this, showing that cutting top tax rates doesn't generate economic growth - although it does increase income inequality.

Now, via Citizens for Tax Justice in the United States, a graph from a report by the Economic Policy Institute authored by Thomas Hungerford (who also wrote a high profile official Congressional Research Service report showing income tax cuts create more inequality than jobs.) It looks at whether high corporate taxes hurt growth, and it speaks for itself:

(Click to enlarge.) This looked at statutory tax rates, then examined growth in the subsequent year. The graph slopes upwards, suggesting that high tax rates might even promote growth - although he notes that this is not statistically significant; another figure comparing growth with effective marginal tax rate on earnings from investment slopes (even more slightly) downwards and is also statistically insignificant. He concludes:
"There appears to be no relationship between capital income taxes and economic growth."
The result, it says, applies both to the statutory corporate tax rate, as well as to the effective rate. This study looks at the United States, whereas the FT study cited above looks at a range of countries. Together, these and others studies suggest strongly that while corporate taxes may be useful for tackling inequality and other ills, they aren't useful tools for promoting growth.

Which is hardly a surprise, if you think about it. Corporate taxes don't go up in smoke: they are a transfer from one sector to another, and they pay for some of the essential ingredients of growth such as the rule of law, or educated and healthy workforces. And see what candid corporate bosses really think about corporate taxes, here.

But the story doesn't end there. The new EPI study also asks what the corporate income tax is for. It cites three reasons:
  • It raises a lot of money ($242.3 billion for the U.S. in fiscal 2012, 10 percent of total federal revenues - down from about 30 percent in the high-growth 1950s.) 
  • It makes the tax system more progressive (that is, poorer people pay less as a share of their income.) The study notes that most studies find that the corporate tax burden falls overwhelmingly (75-82 percent) on capital, rather than on workers or others.
  • It serves as a backstop to the individual income tax - if it were not there, or if rates are far lower than top-rate income taxes, then wealthy rich people will simply turn their income into corporate income, so as to pay the lower rate. (And indeed as corporate taxes
(A bunch of other reasons why we should tax corporations is here. With further reasons here.)
Although this study focuses heavily on the United States, its implications, and those of the other studies we cite, are wide-ranging.

In country after country around the world, the corporation is under attack, both from lobbyists who argue based on flawed evidence that it's a good idea to cut taxes on corporations, and from the disastrous race-to-the bottom on corporate tax rates and corporate tax loopholes - which not only harms the world as a whole, but harms each player in the race who participates.

Read more about all that, here.

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