Word is that the Bush Administration will soon propose a cut in the U.S. corporate income tax, following House Democrat Charlie Rangel's proposal this fall to cut the rate to 30.5% from 35%. As a new study makes clear, such a reduction would give a lift to the U.S. economy when it really needs it.
The study, from the National Bureau of Economic Research, looked at corporate taxes in 85 countries from 1996 to 2005. Economists from the World Bank and Harvard University calculated the effective business tax rate for each country, because some nations have so many tax loopholes that the rate paid by companies can be one-half to one-third the statutory tax rate. The study found that corporate taxes have a statistically significant negative effect on economic performance.
High business taxes were found to reduce a nation's domestic capital investment, the amount of foreign investment into that country, and its overall growth in GDP. The authors conclude that "corporate taxation reduces the return on capital and thus discourages investment" and "reduces the cash flow of the firm" in such a way as to reduce the after-tax capital available for reinvestment.The researchers also found that high corporate levies reduce entrepreneurship, which drives new industries and job growth. In many nations the corporate tax rate is paid both by large corporations and small businesses. In the U.S., small businesses are often organized under Subchapter S of the tax code and thus pay the personal income tax rate.
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