To begin Part III of this series (here’s Part I and Part II), let’s dig into the archives for this video I narrated back in 2007.
At the risk of patting myself on the back, all of the points hold up very well. Indeed, the past 15 years have produced more evidence that my main arguments were correct.
- Lower corporate rates reduce double taxation
- Lower corporate rates reduce taxes on people
- Lower corporate rates boost worker income
- Lower corporate rates boost competitiveness
- Lower corporate rates generate revenue feedback
The good news is that all these arguments helped produce a tax bill that dropped America’s federal corporate tax rate by 14 percentage points, from 35 percent to 21 percent.
The bad news is that Biden and most Democrats in Congress want to raise the corporate rate.
In a column for CapX, Professor Tyler Goodspeed explains why higher corporate tax rates are a bad idea. He’s writing about what’s happening in the United Kingdom, but his arguments equally apply in the United States.
…the more you tax something, the less of it you get. …plans to raise Corporation Tax and end relief on new plant and machinery will result in less business investment – and steep costs for households. …Treasury’s current plans to raise the corporate income tax rate to 25% and end a temporary 130% ‘super-deduction’ for new investment in qualifying plant and machinery would lower UK investment by nearly 8%, and reduce the size of the UK economy by more than 2%, compared to making the current rules permanent. …because the economic costs of corporate taxation are ultimately borne both by shareholders and workers, raising the rate to 25% would permanently lower average household wages by £2,500. …the macroeconomic effects of raising the Corporation Tax rate to 25% would alone offset 40% of the static revenue gain over a 10-year period, and as much as 90% over the long run.
To bolster his argument for good policy on that side of the Atlantic Ocean, he then explains that America’s lower corporate tax rate has been a big success.
Critics of corporate tax reform should look to the recent experience of the United States… At the time, I predicted that these changes would raise business investment in new plant and equipment by 9%, and raise average household earnings by $4,000 in real, inflation-adjusted terms. …By the end of 2019, investment had risen to 9.4% above its pre-2017 level. Investment by corporate businesses specifically was up even more, rising to 14.2% above its pre-2017 trend in real, inflation-adjusted terms. Meanwhile, in 2018 and 2019 real median household income in the United States rose by $5,000 – a bigger increase in just two years than in the entire 20 preceding years combined. …What about corporate income tax revenues? …corporate tax revenue as a share of the US economy was substantially higher than projected, at 1.7% versus 1.4%.
If you want more evidence about what happened to corporate tax revenue in America after the Trump tax reform, click here.
Another victory for the Laffer Curve.
Not that we should be surprised. Even pro-tax bureaucracies such as the International Monetary Fund and Organization for Economic Cooperation and Development have found that lower corporate rates produce substantial revenue feedback.
So let’s hope neither the United States nor the United Kingdom make the mistake of undoing progress.
P.S. The specter of a higher corporate tax in the United Kingdom is especially bizarre. Voters chose Brexit in part to give the nation a chance to break free of the European Union’s dirigiste approach. But instead of adopting pro-growth policies (the Singapore-on-Thames approach), former Prime Minister Boris Johnson opted to increase the burden of taxes and spending. Hopefully the Conservative Party will return to Thatcherism with a new Prime Minister (and hopefully American Republicans will return to Reaganism!).
