The historical and current belief is that taxes in America are low, compared to the world in general. America is the model of free markets, low regulation, and economic freedom. Right? This is simply not the case. The United States has high taxes in general and higher corporate taxes in particular.
The only nations who have a higher corporate tax rate than America are Suriname, Pakistan, Togo, Benin, Republic of Congo, Cameroon, Chad, Libya, and Vietnam. No information was available for The Democratic Republic of Congo, Iraq, North Korea, Montenegro, Serbia, or Sudan. I cannot imagine why.
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Corporate taxes reduce the profits of business owners. This is true because net income is reduced by the tax rate. For example, Firm X, with a $100 investment, earning a 7% return has an income — before taxes — of $7. With a 10% corporate tax rate, net income — after taxes — is $6.30. Firm X now has earned a 6.3% return. In contrast, a corporate tax rate of 40% reduces net income after taxes by $2.80 to $4.20, or a 4.2% after-tax return. This rise in taxes, on the margin, reduces the profit-seeking incentive to take business risks.
Why risk starting a biotech company when inflation-protected T-bill's will give you the same return?
After theory and logic tell us what is true, empiricism can confirm our result.
Thankfully, Professors Young Lee (Hanyang University) and Rodger Gordon (UC — San Diego) have done the work for us. In a 2005 journal article they concluded,
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This paper finds that the corporate tax rate is significantly negatively correlated with economic growth in a cross-section data set of 70 countries during 1970–1997, controlling for many other determinants/covariates of economic growth.
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More specifically, they continue, "The estimates suggest that cutting the corporate tax rate by 10 percentage points can increase the annual growth rate by around 1.1%."[3]
Using these figures, Andrew Chamberlain of the Tax Foundation opines,
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by cutting the U.S.'s combined federal and average state corporate tax rate from roughly 40 percent to 30 percent we could boost U.S. economic growth by around 1.1 percent per year — enough to double our nation's wealth every 63 years.[4]
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Even better, a cut from the actual corporate tax rate of 35% to a rate of 10% would double our nation's wealth every 30 years.
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These are examples of what can be seen. As Frédéric Bastiat reminds us, however, it is imperative to also account for what cannot be seen.
What would the wealth of our nation be today if the corporate tax rate had always been 10% or less? What creature comforts would have been innovated? What new technologies brought to market? What diseases cured?
Due to a history of high corporate taxes these answers are not known, and we are worse off because of it.
http://mises.org/story/3024
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