I'm not spending a lot of time following the US election, but I've noticed quite a few posts in the economics blogosphere about John McCain's proposal to reduce corporate tax rates. The issue of whether or not to cut corporate tax rates has been hashed out pretty thoroughly in Canada over the past few years, and both of the main federal parties have signed on to the general trend in reducing them.
For US readers who are trying to figure out the link between statutory and effective tax rates, here's a summary of data from 2007, courtesy of Jack Mintz, of the U of Calgary and the CD Howe Institute (source – pdf):
There is a progressive case for corporate tax cuts, based on the following points:
- If you're concerned with the effects on long-run growth rates, taxing capital income is almost certainly the worst way of generating government revenues.
- The incidence of the tax on capital income is not on rich capitalists; it's on workers and consumers. (See this post for an elaboration)
No-one has yet figured out how to build a welfare state on high corporate income taxes, and the countries that have the most well-developed social programs have all decided on low corporate tax rates.
That said, the huge flaw in McCain's proposal is that he doesn't provide an answer for the question of what taxes he would be increasing to compensate for the lost revenues. But instead of attacking the notion of lower corporate tax rates per se, the focus of attention should be on getting McCain to answer the question "Very well – what taxes will you be increasing to compensate for the lost revenues?"
Worthwhile Canadian Initiative 
the focus of attention should be on getting McCain to answer the question “Very well – what taxes will you be increasing to compensate for the lost revenues?”
Written like someone with a big government bias. I’d much prefer that the media asked him “What government spending will you be reducing to compensate for the lost revenues?”. However I suspect that that is too audacious to hope for
I agree Stephen, and I agree happyjuggler0. When the government is already drowning in red ink, chopping taxes needs to be offset by additional taxes somewhere else (carbon taxes or cap-and-trade auction perhaps, a corporate tax for certain, but one that gives companies some choices AND allows a government to say they’re taking major steps against climate change), and by cuts in spending. The war in Iraq would be a good place to start, military aid that simply enables others to cause problems is another place, and any subsidies/incentives to big oil companies is next.
There’s probably lots of other pork to cut, but there’s also meaty investments in U.S. infrastructure (one of the few businesses governments should be in) and bailouts of Fannie Mae/Freddie Mac and probably some banks (a business the government shouldn’t be in, but is for now). The math is hard – I’m glad I’m not one of the candidates).
I’d much prefer … “What government spending will you be reducing to compensate for the lost revenues?”
Heck, if cutting spending is a good idea, why wait for quibbling about who gets to escape responsibility for repaying the money we’ve been borrowing of late? Go ahead: “Just say no” to the billions in Iraq? Disown our past deficits’ debt as being caused by a prior regime that lived in an alternate (reality-based) universe? The possibilities are endless and you don’t need audacity, just some political conviction about making your views into reality.
Meanwhile, we might look at the notion of tax cuts being GOOD and spending being BAD (but we do both anyway) as moving us increasingly into the position that commentators reserve for Italy’s huge debt service as a fraction of their GDP.
It seems to me that the definition of “effective corporate rate” used in the paper is not what people are talking about when they compare the statutory rate with the real rate paid after credits, deductions etc.
Alex, you are correct. Stephen could you address the issue?
I’m pretty sure that Jack Mintz – who has published a lot on tax issues in refereed public finance journals – would not make such a mistake. The box on the calculation of effective tax rates begins with this sentence:
The effective tax rate is a summary measure indicating the amount of tax paid as a percentage of the pre-tax returns on investment.
So it looks as though deductions and credits would be taken into account. In fact, it’s hard to see how Belgium’s statutory rate of 34% could be consistent with an effective rate of -4.5% without subtracting those terms.
Then why do US firms reportedly pay so little company tax?
I think the issue here is how profits are defined.
Oh, but tax cuts lead to increased revenues, dincha know that?!