As President Obama's blue ribbon panel begins its deliberations about how to reduce the deficit, Hoover Institution senior fellow Michael Boskin reminds us in an op-ed in this morning's Wall Street Journal entitled "Time to Junk the Corporate Tax," that the real objective should be to reform the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code in order to boost U.S. competitiveness and economic growth. Boskin writes:
…surprisingly little attention is being paid to fixing the most growth-inhibiting, anticompetitive tax of all: the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . Reducing or eliminating the corporate income tax would curtail numerous wasteful tax distortions, boost growth in both the short and long run, increase America's global competitiveness, and raise future raises.
He reminds us that the U.S. has the second-highest corporate income tax rate of all the industrialized countries (50 percent higher than the OECD average). This should worry American lawmakers because a 2008 working paper by economists at the OECD entitled "Taxation and Economic Growth," concluded that "Corporate taxes are found to be the most harmful for growth, followed by personal income taxes and then consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es."
While eliminating the corporate income tax would clearly boost real GDP growth and future wages, Boskin suggests that "junking both the corporate and individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. and replacing them with a broad revenue-neutral consumption tax would produce even larger gains," what Nobel Laureate Robert Lucus believes would deliver "the largest genuinely true free lunch I have seen."
Boskin warns, however, that adding a Value Added Tax (VAT) to our current system in order to fund higher federal spending "will seriously erode our long-run standard of living." Hence, a VAT should only be on the table if it is not only revenue-neutral but accompanied by serious spending control.Share