Lower Corporate Tax Rates Would Boost the Economy

President Obama has talked of lowering the corporate tax rate and improving the tax treatment of profits earned abroad by American companies.  Unfortunately, his desire to use the elimination of "loopholes" to avoid any loss of corporate tax revenue means that he cannot possibly go far enough in reducing corporate tax rates, says Martin Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan and a professor at Harvard University.

• Eliminating every loophole in the taxation of domestic corporate profits identified by the administration's own Office of Management and Budget would raise less than $60 billion of extra revenue in 2011, enough to lower the combined federal-state corporate rate to 35 percent (currently 39 percent).
• The U.S. rate would still be higher than in every other country but Japan, and a full 10 percentage points higher than the average in other industrial Organization for Economic Cooperation and Development countries.

The negative economic impact of the corporate tax rate is compounded by the unusual way in which U.S. firms are taxed on overseas incomes.

• For example, French and American firms that invest in Ireland pay a corporate tax of only 12.5 percent to the Irish government.
• The French firm can then bring its after-tax profit back to France by paying less than 5 percent on those repatriated profits while an American firm would have to pay the 22.5 percent difference between our 35 percent corporate tax and the 12.5 percent Irish tax.

Fortunately, shifting the U.S. method of taxing foreign profits to the "territorial" method used by all other industrial countries would have little adverse effect on corporate tax revenue.  According to the 2010 Report on Tax Reform Options of the President's Economic Recovery Advisory Board, the Treasury estimates that a territorial system might cost only $130 billion over 10 years but could be structured in a way that actually raises revenue.  Even the $130 billion estimate ignores the favorable revenue effect of the resulting increase in profitable corporate investment in the United States, says Feldstein.
The other harmful effects of the corporate tax could be reduced by bringing the U.S. rate into line with those in other industrial countries.

Source: Martin Feldstein, "Want to Boost the Economy?  Lower Corporate Tax Rates," Wall Street Journal, February 15, 2011.