Bob Tippee
Editor
Political discourse in the early 1980s treated "tax rates" and "tax revenue" as synonymous phrases. As they grapple with a new century's economic problems, policy-makers must not repeat the mistake.
It was common in those years long gone to hear US lawmakers lament growth of the federal deficit and to proclaim the need to "raise revenue." By that they meant "raise tax rates," terminology much less likely to elicit political support and much more likely to provoke a fight with the Republican administration then newly in office.
Indeed, the administration of Ronald Reagan adhered to the insight, popularized by Arthur Laffer, that when tax rates are high, lowering them can increase government tax receipts.
Many politicians scoffed at the notion. Some still do.
A new report by Mehreen Younis, research assistant at the National Center for Policy Analysis, Dallas, argues that history supports Laffer's notion and calls for a cut in the corporate tax rate.
"Most countries have found that tax revenues rise following cuts in their corporate tax rates," Younis writes.
Citing Cato Institute data, the analyst reports that while the average corporate tax worldwide fell from 46% to 33% during 1982-99, income tax collections rose from 2.1% of aggregate national income to 2.4%.
Similarly, the average corporate tax rate in 19 member countries of the Organization for Economic Cooperation and Development fell from 45% in 1985 to 29% in 2005. In that period, corporate tax revenue rose from 2.6% of the group's gross domestic product to 3.7%.
Alex Brill and Kevin Hassett of the American Enterprise Institute have estimated that the revenue-maximizing corporate rate in developed countries was about 34% in the late 1980s but has declined to about 26%, according to Younis.
The US corporate tax rate is 35% at the federal level and 39.25% with the addition of average state levies. The latter rate is second among developed countries to Japan's 39.54%.
To stimulate its faltering economy and move back toward fiscal balance, the US should cut the corporate tax rate—quickly. Doing so is not the same as cutting revenue.
(Online Oct. 3, 2008; author's e-mail: [email protected])