The Corporate Tax Laffer Curve

The Cato Institute has published Corporate Tax Laffer Curve, by Chris Edwards (Director of Tax Policy Studies, Cato Institute):

Amid growing concerns about U.S. competitiveness, policymakers are awakening to the fact that America has one of the world’s most inefficient corporate income taxes. Charles Rangel, chairman of the House tax committee, has proposed reducing the federal corporate tax rate from 35 percent to 30.5 percent. Henry Paulson, Secretary of the Treasury, is also promoting a corporate rate cut. These efforts should gain wide support because both businesses and workers would benefit as rate cuts spurred rising investment and improved productivity.

However, Rangel and Paulson seem to be assuming that a corporate rate cut needs to be matched with tax increases to ensure that government revenue isn’t reduced. But there is growing evidence that a corporate rate cut would generate strong dynamic responses that would produce higher, not lower, federal tax revenues. ...

In most countries, corporate rate cuts have coincided with rising tax revenues. For a group of 19 advanced economies with data back to 1965, I calculated the average statutory tax rate and average corporate tax revenues as a share of gross domestic product. Figure 1 shows that the average rate was 40% or more prior to the mid-1980s. But then supply-side tax policies gained support, and tax rates plunged. The average rate in the 19 countries fell from 45% in 1985 to 29% by 2005. During the same period, corporate tax revenues soared from 2.6% to 3.7% of GDP.