A Cut in the Corporate Tax Rate Would Provide a Significant Boost to the Economy

February 19, 2015

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.

Related Articles