Sunday, May 7, 2017

Corporate tax cuts can spur business investment

See Corporate Tax Cut as Growth Elixir? Foreign Experience Suggests Caution by Greg Ip of the WSJ.
"Jack Mintz, a tax expert at the University of Calgary, says Canada would have grown more slowly without the tax changes. Aging alone, he says, has knocked a percentage point off underlying growth since the 1990s. Nonetheless, Canada’s lackluster performance flummoxes him. “One of the puzzles we are facing is, with all the textbook reforms—better fiscal policy, trade policy, tax policy, research and development incentives, education reforms—we haven’t been able to see better results.”

Several studies do find that tax cuts boost investment. One study of Canada’s tax cuts teased out the effect by comparing service industries, which benefited from the cuts with manufacturing, which already enjoyed a low rate and thus had less to gain. Services investment was highly responsive.

A 2004 study of 85 countries by Andrei Shleifer of Harvard University and four others suggests that a 10-percentage-point reduction in the effective corporate tax rate raises investment’s share of gross domestic product by 2 percentage points. Another study, co-written by Kevin Hassett of the American Enterprise Institute, who has been nominated chairman of Mr. Trump’s Council of Economic Advisers, found that in 12 of 14 countries that enacted tax reforms, including the U.S. in 1986, investment rose significantly for the firms that saw the biggest reductions in taxes.
Still, while these studies suggest lower corporate taxes have the predicted effect on investment, they don’t show national growth rose as a result.

Of course no two tax cuts are alike. Other countries may not provide a reliable road map for what awaits the U.S. Many raised other levies, such as the value added tax, to pay for corporate rate cuts. Mr. Trump hasn’t proposed significantly raising any taxes other than limiting some personal tax breaks, and indeed would cut personal income-tax rates, which in theory incentivizes more work."

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