Negative Effects of the Corporate Income Tax

I’ve looked at the evidence for adverse effects of the corporate income tax in a previous post. A brand new article in the American Economic Journal: Macroeconomics provides some more insights. The authors find,

A reduction in the corporate income tax rate leads to moderate job growth. If the corporate income tax were eliminated, the model predicts that the non-employed population would decrease from 34.1 percent to 31.7 percent, about a 7 percent fall in the relative nonemployment rate.

…[E]liminating the corporate income tax has a relatively small overall effect on TFP (an increase of only about 0.9 percent). The productivity loss due to capital misallocation caused by the corporate income taxation is estimated to be 2.6 percent.

…Average welfare is maximized with a 10 percent corporate income tax rate. With a lower corporate income tax rate, the widening of the corporate income tax base allows the government to maintain revenue neutrality without large increases in the personal income tax burden. An overwhelming majority of the population would be in favor of such a corporate income tax cut in this environment (pg. 302-303).

The Tax Foundation also has a new brief that looks at the benefits of cutting the corporate income tax rate:

  • One of the most significant provisions of the Tax Cuts and Jobs Act is the permanently lower federal corporate income tax rate, which decreased from 35 percent to 21 percent.
  • Prior to the Tax Cuts and Jobs Act, the United States’ high statutory corporate tax rate stood out among rates worldwide. Among countries in the Organisation for Economic Co-operation and Development (OECD), the U.S. combined corporate income tax rate was the highest. Now, post-tax reform, the rate is close to average.
  • A corporate income tax rate closer to that of other nations will discourage profit shifting to lower-tax jurisdictions.
  • New investment will increase the size of the capital stock, and productivity, output, wages, and employment will grow. The Tax Foundation Taxes and Growth model estimates that the total effect of the new tax law will be a 1.7 percent larger economy, leading to 1.5 percent higher wages, a 4.8 percent larger capital stock, and 339,000 additional full-time equivalent jobs in the long run.
  • Economic evidence suggests that corporate income taxes are the most harmful type of tax and that workers bear a portion of the burden. Reducing the corporate income tax will benefit workers as new investments boost productivity and lead to wage growth.
  • If lawmakers raised the corporate income tax rate from 21 percent to 25 percent, we estimate the tax increase would shrink the long-run size of the economy by 0.87 percent, or $228 billion. This would reduce the capital stock by 2.11 percent, wages by 0.74 percent, and lead to 175,700 fewer full time equivalent jobs.