Policy Documents

Cutting the Effective Corporate Tax Rate

Jack M. Mintz –
October 1, 2008

With credit markets in disarray and the United States facing a possible recession, Americans are looking closely at the economic proposals of the presidential candidates. Luckily, there is a reform option available to the next president that would generate stronger economic growth and is easy to implement. Corporate tax reform that lowers the rate and achieves a more neutral burden across business activities could boost capital investment, aid the adoption of new technologies, and increase the capacity of the economy to grow.

This bulletin presents new estimates showing that the United States has one of the highest effective tax rates on corporate capital in the world at 36 percent, which compares to an average of just 19.5 percent for 79 other countries studied. These tax rates take into account the corporate income tax, sales taxes on capital purchases, and other capital-related taxes. Cutting the high U.S. tax rate and reducing the current variation in effective rates across industries and assets would improve productivity and generate higher economic growth.

The U.S. corporate income tax rate is so high that cutting it would likely increase federal revenues because it would reduce tax avoidance while stimulating added investment. A statistical analysis finds that the revenue–maximizing statutory corporate tax rate is about 28 percent, substantially less than the current combined U.S. federal and state rate of about 39 percent. Thus, cutting the corporate tax rate by 10 percentage points or more could be a winner for both the economy and the government.