The Sunday New York Times described Apple’s successful efforts to reduce its U.S. and California corporate tax burdens. The article hints that the situation is a moral outrage, and it includes sob stories of governments that are supposedly hurting because they don’t raise enough tax revenues from businesses.
More importantly, the story provides further evidence that corporate profits, investment capital, intellectual property, and reported income are highly mobile in the global economy. Dan Mitchell and I examined these issues at length in Global Tax Revolution.
What should the United States do about the new global reality of footloose corporations? The obvious answer that we discuss in the book is to chop our uniquely high statutory corporate tax rate of 40 percent, which is now the highest in the world.
The NYT reporters did not mention that reform option, perhaps because they focused so much on the fear of governments losing revenues. But I have good news for the NYT reporters! We could chop our corporate tax rate substantially, and as corporate tax avoidance fell and investment rose, the government would probably not lose any money — it may even raise some. Governments, businesses, and the broader economy could all be winners from a corporate tax rate cut.
Here’s some evidence. For 19 OECD countries with good data back to the 1960s, I plotted the average corporate tax rate and the average corporate tax revenues raised by those countries. The chart illustrates the Laffer Curve effect of chopping high statutory tax rates on a mobile tax base.
The chart shows that between the mid-1960s and the mid-1980s, many advanced economies had corporate tax rates of 40 percent or higher. Governments collected about 2.5 percent of GDP from corporate taxes during those years.
Then came the Thatcher-Reagan tax-cutting revolution, and corporate tax rates began falling everywhere. They kept on falling during the 1990s and 2000s. From 1985 to 2010, the average rate for the sample of 19 countries was cut from 45 percent to 26 percent.
Chris Edwards is the director of tax policy studies at the Cato Institute, and editor of www.DownsizingGovernment.org. Before joining Cato, Edwards was a senior economist on the congressional Joint Economic Committee, a manager with PricewaterhouseCoopers, and an economist with the Tax Foundation.
Be the first to read Chris Edwards’ column. Sign up today and receive Townhall.com delivered each morning to your inbox.
Today, at 11:20 AM PT: Get the Market Movements in Advance; Williams Edge Webinar for July 30th, 2014 | John Ransom
In Other News: Pro-Palestinian Rally in Tel Aviv Broken Up by Rocket Fire from Palestine | Michael Schaus