Alan Reynolds has a piece about corporate taxes at Cato, the first portion of which does a fact check on Obama’s “facts” about the corporate tax cut McCain has proposed:
In the last debate, Sen. Obama said, “We both want to cut taxes, the difference is who we want to cut taxes for. . . . The centerpiece of [McCain’s] economic proposal is to provide $200 billion in additional tax breaks to some of the wealthiest corporations in America. Exxon Mobil, and other oil companies, for example, would get an additional $4 billion in tax breaks.”
That $200 billion figure is false. Yet FactCheck.org and most reporters never bothered to ask Mr. Obama where he came up with it. FactCheck.org did discover that Mr. Obama’s claim about “$4 billion in tax breaks for energy companies” came from a two-page memo from the Center for American Progress Action Fund — a political lobby headed by John Podesta, former chief of staff to Bill Clinton, with tax issues handled by two lawyers, Robert Gordon and James Kvaal, former policy directors for the John Kerry and John Edwards campaigns. Those lawyers confused average tax rates (after credits and deductions) with the 35% statutory rate on the next dollar of earnings, so that cutting the latter rate from 35% to 25% would supposedly cut big oil’s $13.4 billion tax bill by 28.5%, or $3.8 billion. That is not economics; it is not even competent bookkeeping.
Tell us what you really think, Alan. As Reynolds notes, a lot of the “analysis” provided for the Obama campaign relies on static analysis, so if you cut corporate taxes by 10% you get a 10% drop in tax revenue. In a world where almost every country has a lower tax rate than the US that just isn’t realistic. Reynolds points to some research that indicates the current corporate tax rate is past the peak on the Laffer curve. In other words, a reduction in the rate would actually increase revenue:
In the U.S today, the combined federal and state tax on corporate profits averages 40%, which is increasingly out of line with the rest of the world. The average corporate tax rate dropped to 25.9% in 2008 from 37.7% in 1996 among 97 countries surveyed by KPMG, and to 23.2% from 38% in the European Union. Corporate tax revenues typically increased as a share of GDP after tax rates were reduced. Countries with corporate tax rates from 12.5% to 25%, such as Ireland, Switzerland, Austria and Denmark, routinely collect more corporate tax revenue as a share of GDP than the anemic 2.1% figure the Congressional Budget Office projects for the U.S.
In a new Tax & Budget Bulletin at Cato.org, Jack Mintz of the University of Calgary estimates that a federal-state corporate tax rate higher than 28% loses money for the government. Kimberly Clausing of Reed College estimated revenues would be maximized with a 33% federal and state tax. Kevin Hassett and Alex Brill of the American Enterprise Institute found “the revenue maximizing point has dropped over time, and is about 26%.” In all of these studies, cutting the federal tax to 28%-30% sooner rather than later is very likely to raise revenue. (emphasis added)
That we collect a lower percentage of GDP in corporate taxes indicates either that the rate is too high or there are massive loopholes. My guess is that it is some of both and we should be working on both.
Obama’s rhetoric on the corporate tax reveals a basic misunderstanding of economics. Obama can demonize business all he wants but the fact is that corporate taxes, like all taxes, are paid by individuals. You can’t extract taxes from a corporate headquarters building; it can only be extracted from consumers, workers or investors. Those are the facts and no campaign slogan will change that.
We live in a world where capital and the companies that control it are increasingly mobile. In that world, if we want companies to locate here and provide jobs to our citizens, we will have to compete with other countries that all have lower corporate tax rates. That is a fact of life and cannot be ignored.
If cutting corporate taxes would increase revenue and increase the incentive for companies to locate in America, why wouldn’t Obama be for it?