I posted on August 16 (URGENT: CUT THE U.S. CORPORATE TAX RATE) on the urgency for the US to cut the corporate tax rate as a quick and efficient way to re-prime the economy. US corporate tax rates are higher than just about everywhere else and
the gap between the US and competing countries has been seriously widening since the year 2000 as most OECD countries have been cutting corporate taxes. The OECD average corporate tax rate is now 26.2% compared with 35% in the US. US corporations are paying 50% more taxes than most of their foreign competitors. If corporations move plants and equipments abroad to lower their wage bill, they certainly will favor expansion where the tax bill is 33% lower.
Canada’s corporate tax rate was cut, again, in 2010, to 18%, on its way to 15% in 2012. Japan, which currently has the highest tax rate at 40% is reportedly about to slash it by as much as 15%. And, as today’s FT Lex column reports, the UK will also make significant cuts in its corporate tax rates. David Osborne, Britain’s finance minister, is very clear: "My aim is to create the most competitive corporate tax regime of any G20 country."
(…) prime minister David Cameron’s decision had less to do with the fiscal challenge than with a long-standing debate on whether government coffers are ultimately helped more by high tax rates or growth-stimulating low ones.
On corporate taxes at least, a paper recently released in the American Economic Journal suggests Mr Cameron is doing the economy a favour. Data on 85 countries from a survey co-conducted with PwC shows a negative correlation between corporate taxes and investment, after adjusting for other influences. For every 10 percentage points of extra corporate tax, a country’s ratio of investment to output falls by 2.2 percentage points. (The average investment ratio is 21 per cent.) The same pattern holds for foreign direct investment – higher tax, less FDI – by a similar magnitude.
A worse effect of higher tax bills may be the discouragement of job-creating entrepreneurs. A 10 percentage point higher tax rate equates to a fall from five companies per 100 people to three, while company registrations per year are about a fifth lower. The data also suggest manufacturing sectors are hit harder by higher taxes than service industries. This could be because service providers are more prone to stop paying taxes altogether if they rise too far. (…)
As I wrote in my August 16 post:
The Bush tax cuts failed because they only targeted individuals who used them to overspend on housing and foreign made goods, creating few sustainable jobs. Lower corporate tax rates are more effective since they make American corporations immediately more competitive, more profitable and more inclined to invest in America, creating long-lasting economic benefits. (…)
President Obama, its time to show wisdom, vision and leadership. Yes you can!
Disclosure: no position