While corporate tax rates have fallen in most developed countries, the rate in the United States has remained high. A look at the relationship between the statutory rate and corporate tax receipts in the OECD suggests that the United States could lower its corporate tax rate without losing any revenue. A reduction to the corporate tax rate would also improve efficiency and global competitiveness.

Research Fellow Alex Brill

For the first time since 1993, lawmakers seem poised to seriously alter the statutory corporate tax rate and change the corporate tax base. President-elect Barack Obama has indicated a willingness to consider reducing the corporate tax rate,[1] while House Ways and Means Committee Chair Charles B. Rangel, D-N.Y., has, since October 2007, aggressively advocated for a significant reduction in the statutory rate. In recent weeks Rangel has indicated a desire to reduce the corporate tax rate to 28 percent.[2]
 
The United States has the second highest statutory corporate tax rates among industrialized countries, largely because other countries have dramatically reduced their statutory rates while the U.S. rate has remained constant. As a result, the rates of return to corporate tax planning strategies for U.S.-based multinational corporations have increased and the efficiency of the tax system has eroded. Furthermore, the higher U.S. tax rate, in conjunction with a worldwide system of taxing income, adversely affects the global competitiveness of U.S. businesses competing abroad, as the after-tax rate of return on foreign investments may be lower for U.S.-based corporations than for foreign-based firms. Finally, the high statutory rate in the United States exacerbates a range of inefficiencies in the current tax system, including the distortion between debt and equity financing, the interasset distortion from uneven capital taxation, and the tax distortions caused by the choice of organizational form (C corporation versus passthrough entities).[3]
 
Because the federal corporate tax system generates approximately one-seventh of the revenues collected by the general fund,[4] policymakers may be concerned that a significant reduction in the statutory rate, if not offset with other tax increases, would further strain the fiscal resources of the federal government. Also, some analysts have emphasized that corporate tax receipts as a share of the economy are already low in the United States relative to other industrialized nations.[5]

This article focuses on the potentially neutral or even positive effects of cutting the U.S. corporate tax rate on tax receipts and the clearly positive effects of a reduction in the tax rate on economic distortions. First, to understand the impact of a change in the tax rate on tax receipts, I explore the relationship between the statutory corporate tax rate among developed countries and the corporate tax collections as a share of gross domestic product in those countries. Results suggest a parabolic relationship frequently referred to as a Laffer Curve. The article then discusses the effects of a lower corporate tax rate on the distortion between debt and equity and between the corporate and noncorporate sector, and the implications for global competitiveness and the tax consequences of foreign-source income. . . .

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Alex Brill is a research fellow at AEI.

Notes

1. Bob Davis and Amy Chozick, "Obama Plans Spending Boost, Possible Cut in Business Tax," The Wall Street Journal, June 17, 2008.
 
2. Ryan J. Donmoyer and Peter Cook, "Rangel Plans Push to Cut Top Corporate Tax Rate to 28 Percent," Bloomberg.com, Nov. 15, 2008, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ag7lSuB.yyII.

3. Alex Brill, "Taxing Capital," American Enterprise Institute Tax Policy Outlook 1, Feb. 2008, available at http://www.aei.org/publications/pubID.27474,filter.all/pub_detail.asp.

4. Congresional Budget Office, "Revenues by Major Source, 1968 to 2007, in Billions of Dollars," Sept. 2008, available at http://www.cbo.gov/budget/data/historical.pdf.

5. Jane G. Gravelle and Thomas L. Hungerford, "Corporate Tax Reform: Should We Really Believe the Research?" Tax Notes, Oct. 27, 2008, p. 419, Doc 2008-18748, 2008 TNT 209-18.