In the finale of my three-part series on lower corporate tax rates (here, here, and here), I shared this old video of me arguing for a lower corporate tax rate.

But a lower corporate tax rate is just part of what’s needed, which is why I’ve also explained other topics that are important for a properly designed system of business taxation.

1. Depreciation vs. expensing for new business investment.
2. The impact of double taxation – either from dividend taxation or capital gains taxation.
3. International tax rules and the choice of worldwide taxation vs territorial taxation.
4. The debate on consumption-base taxation vs. Haig-Simons taxation.
5. Whether there should be carry forward rules and/or adjustments for net operating losses.
6. The appropriate tax treatment of debt and equity

So what happens when you fix all the problems with business taxation? Or if you at least move closer to a well-designed corporate tax?

We now have some answers to those questions. A new study by two European economists, Michael Christla and Monika Köppl–Turyna, looks at the relationship between overall corporate tax policy and economic performance.

Here are some excerpts.

This paper examines whether the design of a country’s tax system matters for economic growth, using the Tax Foundation’s International Tax Competitiveness Index (ITCI) as a multidimensional, legislated-features-based measure of tax system quality. …we are able to assess which dimensions of tax competitiveness are most relevant for growth. …improvements in aggregate tax competitiveness are positively and significantly associated with real GDP per capita growth… Improvements in corporate tax competitiveness, encompassing not just the statutory rate but also cost recovery rules, loss carryforwards, patent box regimes, and complexity, are robustly associated with higher growth across all static and dynamic specifications. …the dynamic analysis shows that the growth effect of corporate tax competitiveness is not limited to a contemporaneous response: the cumulative impact grows over time and is most precisely estimated at the three-year horizon, with a statistically significant cumulative effect of approximately 0.16 percentage points per one-point improvement in the corporate tax score. …the concentration of growth effects in the corporate tax pillar is consistent with the theoretical channels emphasized in the investment and capital allocation literature: firms’ forward-looking investment decisions are sensitive to the overall tax burden on returns to capital, which depends on the combination of rates, depreciation rules, loss treatment, and international provisions, rather than the headline rate alone. Governments seeking to improve growth performance through tax reform should therefore attend to the full architecture of the corporate tax system, not merely the statutory rate.

Daniel Bunn of the Tax Foundation summarizes the most important finding in the study.

By the way, the report relied on data from the Tax Foundation’s International Tax Competitiveness Index, so readers may want to check out those findings.

I’ll close by observing that corporate tax is an area where Trump has done the right thing. He lowered the corporate tax rate in 2017 and he reduced the tax bias against new business investment in last year’s big tax bill.

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Image credit: N i c o l a | CC BY 2.0.