Cutting the Corporate Tax Rate Would Pay for Itself

March 12, 2013

New Investment and Growth Would Raise Living Standards

Washington, D.C., March 12, 2013—Cutting the U.S. corporate tax rate would increase economic growth, boost wages and employment, and provide a net revenue bonus for the U.S. Treasury, according to a new study by the Tax Foundation.

Contrary to previous estimates that ignore the economic effects of cutting rates, the new Tax Foundation study includes an understanding of how employers and investors would respond to a lower tax burden. The results show that decreasing the corporate income tax rate would increase economic growth nationwide, generating more than enough federal revenue from other tax sources to offset the smaller total collected from corporations.

“Very few tax cuts pay for themselves, but this would be one that does,” said Tax Foundation Fellow Michael Schuyler. “Our study focuses on the results of cutting the corporate rate from 35% to 25%, but the results suggest that even zeroing out the corporate income tax entirely could pay for itself over time.”

A 25% corporate rate would increase Gross Domestic Product by 2.2% and increase total federal revenues by $20 billion. The Tax Foundation model finds that a corporate tax rate of 14% would maximize federal revenues, producing an extra $27 billion over the status quo.

A lower corporate income tax rate would invigorate the sluggish U.S. economy by reducing the tax penalty on saving and investment. A larger, more vibrant economy would help people throughout the nation by generating higher real incomes and a greater supply of goods and services.

Unfortunately, conventional revenue estimates assume that tax changes never have growth effects. This unrealistic assumption makes for a simpler analysis, but yields results that are highly misleading.

“The benefits from a more prosperous economy would justify lowering the corporate tax rate even if federal revenues fell, but given the expected revenue gain, it’s a slam dunk,” said Schuyler.

Tax Foundation Special Report No. 208, “Growth Dividend from a Lower Corporate Tax Rate” by Dr. Michael Schuyler is available here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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