Corporate Tax Laffer Curve

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.