We have seen the future, and it sucks.

On Company Taxes, U.S. Should Follow World Down

30th August 2011

Ramesh Ponnuru speaks some inconvenient truth.

Earlier this year, Kevin Hassett and Aparna Mathur — economists affiliated with the American Enterprise Institute — calculated the effective average corporate tax rate for all advanced economies. That’s the rate that, according to an earlier study, has the most impact on where companies decide to invest. Their results: Our rate in 2010 was 29.5 percent, while other members of the Organization for Economic Cooperation and Development averaged 20.5 percent. (A similar calculation by the World Bank reached a similar conclusion.)

Controversy over whether our corporate taxes are high or low is matched by controversy over who pays them in the first place. This issue recently made the news when Republican presidential candidate Mitt Romney informed a heckler that people pay the corporate income tax. But which people? The Congressional Budget Office and the Treasury Department have traditionally assumed that owners of capital pay the tax. More recent models, though, emphasize that if capital can cross borders, it’s labor that gets stuck paying the tax. Capital moves to countries where it is taxed less. Less capital investment here leaves Americans with lower-wage jobs.

Empirical work on the subject has yielded a wide range of outcomes. At the low end of estimates, three economists led by Mihir Desai have found that 45 percent of the corporate income tax falls on labor. The high-end estimate comes from R. Alison Felix, an economist at the Federal Reserve Bank of Kansas City, who concluded that labor pays 420 percent of the burden: For every dollar of revenue the tax raises, wages fall by $4.20. A study by the Tax Foundation, a nonpartisan think tank, split the difference, finding that wages drop $2.50 for every dollar raised.

One Response to “On Company Taxes, U.S. Should Follow World Down”

  1. Dennis Nagle Says:

    So if they cut my company’s taxes in half, I’ll get another $2.40/hr? Cool! Let’s do it!