Aparna Mathur

Many countries have restructured their corporate tax structures in recent years and cut tax rates in efforts to improve corporate output and stimulate their economies. These changes have put pressure on the United States to reform its corporate tax code, and AEI has sponsored research in the area.

At a March 17 AEI conference, a group of leading experts examined the effects of corporate taxation. AEI's Kevin A. Hassett discussed two recent changes affecting the corporate income tax: the bonus depreciation offered in 2001–2004 and the preferential dividend and capital gains tax rates introduced in 2003 to reduce the "double tax" on corporate income. He found that "immature" companies--those that have never paid a dividend--saw larger stock price increases from the latter provision than companies that have paid dividends.

Andrei Shleifer of Harvard University argued that "effective corporate tax rates have large and significant adverse effects on corporate investment and entrepreneurship." Roger H. Gordon of the University of California, San Diego, presented evidence that a more progressive corporate tax rate schedule encourages profitable firms to borrow and discourages less profitable firms from doing so, which helps resolve problems in the loan market. Harvard Business School's Fritz Foley presented statistical evidence indicating that "the burden of corporate taxation is not entirely borne by corporations or owners of capital . . . but is instead shared between labor and capital."

On a similar note, in a 2006 working paper, Hassett and AEI's Aparna Mathur examine the connection between taxes and manufacturing wages. Using data for seventy-two countries over twenty-two years, they find that higher corporate tax rates result in lower wages. They attribute this to "capital flight"--the movement of businesses from high-tax countries to countries with lower tax rates, which decreases productivity, and thus wages, in the former country. Hassett and Mathur advocate international tax competition because it leads to higher wages. Their work was cited in The Economist.

In another recent paper, Hassett and AEI's Alex Brill found "strong statistical evidence of a Laffer curve in the international corporate tax data"--that is, that corporate tax revenues fall as the corporate tax rate is increased beyond a certain level. Moreover, they find that the rate at which revenue is maximized "has dropped over time." Countries with rates above the maximizing level not only collect suboptimal revenue but are also less competitive than other countries. 

The increase in the number of governments lowering the corporate income tax to attract investors worries some observers. They have argued that countries should collude to keep rates high, claiming that global coordination provides the solution for unhelpful global competition. But AEI's Alan D. Viard writes in the April edition of Tax Policy Outlook that this recommendation is misguided. He argues that the corporate income tax has distinct flaws unrelated to competitive pressures--it is not neutral with respect to savings, type of firm, or type of securities. "Rather than trying to prop up the corporate income tax against competitive pressures," he writes, "countries around the world should celebrate its decline and work for
its demise."

For more information on AEI scholars' work on the corporate income tax, visit www.aei.org/corporatetax/.