Many people are beginning to wrap their minds around the House Republicans’ proposed destination-based cash-flow tax and what it means for tax reform. Most people are still looking into the tax’s impacts on trade and how...
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- A Cut in the Corporate Tax Rate Would Provide a Significa...
A Cut in the Corporate Tax Rate Would Provide a Significant Boost to the Economy
A cut in the corporate tax rate would have large effects on GDP, but minimal effects on total federal revenue in the long run. The large boost to the size of the economy from a corporate tax cut comes from a lower cost of capital.
The corporate tax rate is, in effect, a tax on corporate investment; a high corporate tax rate discourages investment, whereas a low corporate tax rate encourages investment. Additionally, the competitive nature of the global economy corporate taxes makes for strong responses to tax changes as corporate investment moves to countries with more competitive tax systems. The increase in investment from a corporate tax rate cut would lead to higher wages, more jobs, and a larger economy.
For example, if the corporate income tax were eliminated, the size of the economy would grow by 6.1 percent in the long run. This would lead to more jobs and higher wages. The additional growth would leave total federal revenue virtually unchanged in the long-run, though the government would likely lose revenue as the economy adjusts. In the long run, the loss of corporate tax revenue due to cutting the corporate tax rate is recouped through the combination of increased economic growth and the distribution of the untaxed money to taxpaying individuals.
Conversely, an increase in the federal corporate tax rate to 40 percent or 45 percent would be bad for the economy and government revenues.
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The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.