For some people, the answer to every problem is a tax cut
In today’s Bloomberg commentary, Kevin Hasset writes in “Let’s Cut Corporate Taxes to Create More Jobs”:
Jan. 9 (Bloomberg) — With President George W. Bush’s State of the Union address approaching, Washington wonks are stewing over the year’s policy agenda. A look at the latest economic data suggests an obvious change that should have broad bipartisan appeal: a cut in the corporate tax.
The case for a reduction begins with jobs. Because the U.S. economy is growing nicely, almost everyone expected healthy job creation in December. But last week’s jobs report showed an addition of just 108,000 jobs, about half the expected number.
He concludes thus:
So what explains the advantage gained from locating production overseas?
The most powerful factor appears to be taxes. The U.S. has the highest corporate tax rate among the world’s most developed economies. With a combined federal and state tax rate of 39.3 percent, the U.S. taxes corporations at a rate that is 10 percentage points higher than the average of other nations in the Organization for Economic Cooperation and Development.
In a world of tight margins, a 10-percentage-point disadvantage is humongous. And the U.S. rate is well above that of countries such as Ireland, which has enjoyed an economic boom that coincided with a reduction in corporate taxes to 12.5 percent.
I have two observations. The first is that it would be useful to note what a recently released Congressional Budget Office report on the international comparison of corporate tax rates noted:
Although the United States’ statutory corporate tax rates are among the highest of those in OECD countries, they are comparable with the statutory rates imposed by other members of the Group of
How effective marginal corporate tax rates in the
United States compare with other countries’ rates
depends on the type of corporate investment being
made and the way in which it is financed. Corporate
investments are financed by either shareholders or
lenders (which include corporate bondholders). Compared
with the average effective marginal corporate tax
rates for shareholder-financed investment in machinery
among all other OECD countries, the United
States’ rate is slightly higher; compared with the average
among other G7 countries, the United States’ rate
is about the same. Compared with the average rate for
shareholder-financed investment in industrial structures
among all other OECD countries, the United
States’ rate is significantly higher; however, the United
States’ rate is close to the average among other G7
countries. In contrast to rates for shareholder-financed
investment, the United States’ effective marginal corporate
tax rate for lender-financed investment in machinery
is low by comparison with the average for
other OECD countries and for other G7 countries.
From an international perspective, although the
United States’ effective marginal corporate rates for
shareholder-financed investments are higher than the
average, such rates for investments financed by a combination
of shareholders and lenders may be lower
than the average if a sufficient fraction of the marginal
investment is financed by lenders.
My reading of the CBO report is that US effective corporate tax rates are not necessarily out of line with those in other OECD countries. (There is also a vigorous debate on this subject on at Angry Bear, where the CBO report was discussed earlier).
My second, and more important, point (here is where partial equilibrium comes into play) is that the analysis ignores completely the fiscal implications in the U.S. At a time where the medium and long term Federal budget deficit trajectory looks grim, private consumption is widely acknowledged to be too high, and the dollar’s appreciation is placing additional stress on U.S. manufacturers, decreasing tax receipts, and further exacerbating the budget deficit, seems wrongheaded.
Now, in a Lafferite world, or a world where one believes the Bush
Administration and the Congress would agree to cut spending in line with the decrease in tax receipts, perhaps this would make sense. I leave it to the readers to decide whether such worldviews, or the textbook view, is more in line with reality.