Corporate Tax Reform Could Benefit the Economy

by Aviva Aron-Dine

Unpaid-For Rate Cuts Would Likely Hurt Most Americans

Recently, proposals for federal corporate tax cuts and corporate tax reform have received increasing attention. The corporate income tax appears to have joined the long list of tax issues likely to be addressed, or at least debated, over the next few years.

Over the coming decades, the United States is projected to face large fiscal difficulties. Rising health care costs and the aging of the population will make it a challenge to meet existing federal commitments, much less to make new investments in areas like covering the uninsured, early childhood health care and education, and science and technology.

In this fiscal environment, those who seek to reduce the overall level of corporate revenues by cutting the corporate tax rate without broadening the tax base would need to show that the economic costs of current tax rates are large enough to warrant directing scarce resources toward corporate tax cuts rather than other priorities.

This report finds that the economic evidence does not meet that burden of proof.

Key findings include:
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 analysis is posted to: http://www.cbpp.org/6-4-08tax.htm http://www.cbpp.org/6-4-08tax.pdf, 21pp.