Why the Tax Policy Center is wrong: The U.S. can slash its corporate tax rate

Great post by James Pethokoukis of AEI

The folks at the Tax Policy Center (and the Joint Committee on Taxation) are dead wrong on this one:

It has been an article of faith among most congressional Republicans and many Democrats that the corporate tax rate should be cut from today’s top level of 35 percent to 25 percent—or even less. And backers of the idea breezily suggest this could be paid for by scaling back some corporate tax breaks. But a new report released today by the congressional Joint Committee on Taxation concludes it can’t be done.

The non-partisan JCT found that even if Congress scrubbed every single corporate preference from the code (a political fantasy if ever there was one) it could not get the corporate rate below 28 percent without adding to the budget deficit, raising taxes on individuals, or cutting spending.

My Tax Policy Center colleague Eric Toder has been making a similar point for months: It is painfully difficult to find the money to reduce rates very much. Unlike corporate breaks, there are more than enough individual tax preferences out there to pay for individual rate reduction (and have money left over the cut the deficit). The problem is merely a lack of political will. Abolish the mortgage interest deduction anyone?

My advice to congressional tax cutters is to cut the corporate rate whether or not they can “pay” for it. And to at least 26 percent. There is good reason to believe that the U.S. rate—currently at 35 percent—is way, way on the wrong side of the Laffer Curve, as AEI’s Kevin Hassett and Alex Brill point out in a 2007 study:

Corporate tax rates among industrialized nations have been declining steadily since the mid 1980s. … This note explores these changes and finds, similar to Clausing (2007), strong statistical evidence of a Laffer curve in the international corporate tax data. This conclusion remains even when significant potential outlier countries, such as Ireland, Switzerland and Norway, are excluded from the sample … We find robust evidence that a Laffer curve has existed in the corporate tax sphere throughout most of our sample period. It is not merely a recent phenomenon. We also find that the revenue maximizing corporate tax rate was about 34 percent in the late 1980s, and that this rate has declined steadily to about 26 percent for the most recent period.