Die, corporate income tax-cuts, die!


SocialTwist Tell-a-Friend

Sometimes a theory is so ingrained in conventional thought that it becomes impossible to exterminate. Much like zombies, these theories manage to persist despite having been bludgeoned to death by decades of research and data. For a prime example of one of these zombie theories, one need look no further than the theory that cutting corporate income taxes is an effective tool for promoting economic growth.

Republican presidential hopeful Rick Santorum has argued that we should cut corporate taxes in half and eliminate them all together for manufacturers. Iowa Gov. Terry Brandsted has made a similar call — demanding a 50 percent cut in Iowa's corporate-tax rate. Even the Iowa Legislature has joined in; it is considering legislation that would provide tax-breaks for businesses that sell to "anchor suppliers" — businesses stationed in Iowa that primarily sell out of state.

The arguments for slashing corporate taxes can be distilled to three points. 1) corporate taxes eat away at corporate profits. 2) Because corporate taxes so heavily affect profits, they influence where businesses choose to invest. 3) The business-friendly environment created by lowering corporate taxes spurs large-scale economic expansion.

To assure you that this theory is in fact dead, despite all appearances of being undead, I will address all three points.

First, do corporate taxes have a meaningful impact on corporate profits? The short answer is no.

In a 2011 paper, Peter Fisher, a University of Iowa professor emeritus and research director of the nonpartisan Iowa Policy Project, proved as much. In his paper, Fisher points out that total tax-liabilities account for 1.8 percent of total business expenses. Of which, only about 9.5 percent is made up of corporate taxes. That means halving corporate taxes would reduce total businesses expenses by 0.9 percent. To be sure, that number is greater than 0.0, but not by much.

This brings me to point two, and my second question. Do lower corporate taxes attract investors?

Large-scale analyses find that the answer is no.

As evidence, I point to the national-level analysis of Washington University in St. Louis Professor Nathan Jensen, exploring the relationship between actively lowering corporate taxes and changes in foreign direct investment. Jensen concluded:

"There is little evidence that an individual country's level or change in capital taxation has any impact on [investment] inflows … Utilizing dynamic tests for up to 19 [Organisation for Economic Co-operation and Development] countries from 1980-2000 and isolating the impact of time varying factors on [investment] inflows, I find no empirical relationship between corporate taxation and [investment] inflows."

This leaves one more dimension of this argument to address, and one more question: Do lower corporate taxes spur economic expansion? In this case the answer is in fact yes. However, that expansion is too small to justify the lost tax-revenue.

In a 2003 brief penned by Fisher and Iowa Policy Project associate researcher Elaine Ditsler, the scholarly duo found that a 20 percent reduction in total business tax liabilities — corporate, income, and sales taxes — increased business expansion by 4 percent. That means the average state could expect to benefit from an additional 0.4 businesses per 100 existing businesses during an economic boom. To put that in context, the average state added 10 new establishments per 100 existing establishments during the 1990s.

The body of work exploring the value of cutting corporate taxes is extensive, compelling, and largely disproves the assertions of anti-tax advocates. If Iowa were in fact to go ahead and cut its corporate taxes by half, Iowa state revenues could expect to drop by as much as$150 million. And if the data on the subject are any guide, that loss in revenue is the only meaningful change we could expect.

Sometimes fatally flawed theories refuse to do us the favor of quietly dying and removing themselves from the public discourse, and there is no better example of this than the theory that lowering corporate taxes is a cost effective tool for spurring economic growth.

In today's issue:

comments powered by Disqus

Privacy Policy (8/15/07) | Terms of Use (4/28/08) | Content Submission Agreement (8/23/07) | Copyright Compliance Policy (8/25/07) | RSS Terms of Use

Copyright © The Daily Iowan, All Rights Reserved.