Boskin on Junking the Corporate Tax

May 6, 2010

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 tax 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 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 taxes."

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 tax 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.

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