Friday, April 18, 2014

Corporate taxation and economic growth aren't friends.

This post is dedicated to all the people who know nothing about economics and want the government to force corporations to "pay their fair share".

The corporate tax is probably the most harmful tax on economic growth since it discourages investment and thus productivity growth (as well as encouraging hiding income over seas).

Take for example, a series of OECD papers by Johansson et al. that examined 21 OECD (rich) countries between 1971 and 2004 that found corporate taxes were the most harmful to economic growth, followed by income taxes, then consumption taxes, and lastly property taxes. According to the a summary of the study:

"[A] 1 percent shift of tax revenues from income taxes (both personal and corporate) to consumption and property taxes would increase GDP per capita by between 0.25 percent and 1 percent in the long run." [1]

Not only that, but corporate taxes end up hurting workers slow growth in investment results in slower productivity growth, and thus slow growth in wages (since wages are based on worker productivity). In a recent working paper published by the National Bureau for Economic Research, economist Laurence Kotlifoff estimates that abolishing the corporate tax and replacing the lost revenue with higher income or consumption taxes would increase workers wages in the long run by 12-13%. [2]

Here is some more research on corporate taxes:

-Mertens and Ravn examine corporate taxes after WWII in the US and find that "A 1 percentage point cut in the ACITR [average corporate income tax rate]raises real GDP per capita on impact by 0.4 percent and by 0.6 percent after one year." Additionally, they find that a 1 percentage point cut in the APITR [average personal income tax rate] raises real GDP per capita by 1.4 percent on impact and by up to 1.8 percent after three quarters." [3]

-Ferede and Dahlby examine corporate taxes  and their effect on economic growth in the Canadian provinces and conclude by stating: "Our empirical analysis suggests that 1 percentage point cut in the corporate tax rate is related to a 0.1-0.2 percentage point increase in the annual growth rate." [4]

-Economists Young Lee and Roger Gordon examine corporate taxes in 70 countries over 20 years and state: "This paper finds that the corporate tax rate is significantly negatively correlated with economic growth in a cross-section data set of 70 countries during 1970-1997, controlling for many other determinants of economic growth." [5]

-Another study from Johansson et al. found that: "Corporate income taxes can be expected to be the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and in productivity improvements." [6]

-Kevin Hasset and Aparna Mathur of the American Enterprise Institute examined 72 countries over 22 years and found that on average, a 1% increase in the corporate-tax rate is associated with a 0.8% drop in wages over the next five years after controlling for other relevant macroeconomic factors. [7]

These are just some studies which examine how corporate taxes effect wages and economic growth. I think it's safe to safe that the majority of studies find that corporate taxes are harmful to economic growth, with a minority finding is has no effect. Regardless, this research exemplifies how foolish it can be to simply make assumptions that the government can raise taxes on corporations with no adverse consequences.


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