One Way to Grow the Economy: Cut the Corporate Tax Rate

June 10, 2014

In a recent column, Larry Kudlow says a great way to grow the economy is to cut the corporate tax rate, or maybe even get rid of it:

Readers know that corporate tax reform is my single-favorite pro-growth policy. Actually, I’d like to abolish the corporate income tax altogether — including all the cronyist, big-government special favors, carve-outs, deductions, and exemptions. Out with all the K Street mischief.

You know who the biggest winners would be? Wage earners. That’s right. Corporations don’t pay taxes. They merely collect, and then pass on the tax cost in the form of lower wages and higher consumer prices.

Want to maximize wages? Forget the minimum wage and embrace corporate tax reform.

Know which European country has the fastest growth rate right now, at 3 percent? Great Britain. And the Brits have a 20 percent corporate tax rate. Compare that to our 35 to 40 percent rate.

It’s no secret why corporate profits are going overseas, and thus destroying American jobs at home. High corporate tax rates.

I go back to the work of Laurence J. Kotlikoff, economics professor at Boston University. In his models for the elimination of the U.S. corporate tax, the real wages of unskilled and skilled workers rise by 12 percent, real GDP growth increases 8 percent, and capital investment soars 23 percent (emphasis added).

In other words, significant U.S. corporate tax reform would jack up wages and jobs — predominantly middle class wages and jobs. It would attract investment from all over the world. And to U.S. companies that shelter profits overseas, we’d be able to say, “Come home to America.”

Our work shows similar results to Kotlikoff’s. In work from last spring, we found that if we were to cut the corporate tax rate to zero, GDP would increase by about 6 percent, investment would increase by close to 20 percent, and hours worked (i.e. number of jobs) would increase by 1 percent. On top of this, the federal government would actually see an increase in federal revenue due to increased total output.

Recent analysis shows that if we were to merely cut the corporate rate to 25 percent, we would still see great benefits. GDP would increase by about 2 percent, investment by close to 6 percent, and wages by about 1.7 percent. Again, we would see a slight increase in total federal revenues due to additional output.

The bottom line: a lower corporate tax rate would be good for everyone.

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