Sunday, April 10, 2011

Global Corporate Tax Revenues Are a Total Laffer

The Economist points us to a rather telling chart about the amount of revenue (as a percentage of total GDP) that major industrialized nations collect from corporate taxes:

The story accompanying the chart makes two very important points.  First, they talk about the impact of global tax competition on corporate tax rates, and what happens in a modern, globalized economy if a typical nation tries to tax its way to revenue abundance:
Two countries stand out from the top of the table – Australia and Norway. Both have the benefit of natural resources and can thus get tax revenue from “captive” companies. Other countries have to compete to attract manufacturing and service companies; their take from the corporate sector thus hovers between 2-4% of GDP. America is at the bottom of the range, although its tax take from this area is not as exceptional as for consumption. (An important caveat is that total tax revenue in the US is around 10 percentage points below the OECD average, so one would expect it to lag behind in individual categories.) Some will cite this table as an argument for taxing profits more heavily, by closing loopholes and eliminating tax breaks. The counter-argument is that companies have three options: to pass on the taxes in the form of higher prices; to offset the effect on their margins by employing fewer workers, or paying existing workers lower wages; or by moving to a more tax-friendly domicile.
In short, if a nation raises corporate taxes on "non-captive" manufacturing and service industries, the victimized companies will eventually just leave (and take their jobs and revenues with them).  And I'd be remiss to not mention the embarrassing little fact that the United States has the highest statutory (and effective) tax rate in the industrialized world:

It is simply unfathomable that this chart has nothing to do with the first chart, wouldn't you agree?  But hey:  We're number 1!  We're number... oh, wait.

Second, and on a very related point, the Economist highlights the extreme fallacy that global tax competition starves national budgets of sweet, sweet tax revenue:
Note, by the way, that there is a big difference between tax rates and tax take. The French complain about unfair tax competition from the Irish (the latter have a 12.5% rate) but the Irish actually get a higher proportion of their GDP in tax revenue than the French. And note also that there may not be scope to raise huge amounts from this area, unless you are as lucky as the Norwegians. Even if America were to move to the OECD average, that would only boost the tax take by around 1% of GDP, when the deficit is in double digits.
So much for the pervasive argument from those on the left that America's insane budget problems can be solved by just taxing evil corporations (and rich people), eh?  But here I'm a little confused: despite the great data showing that (i) global tax competition can have dire revenue consequences for countries with itchy taxing fingers; and (ii) lower corporate tax jurisdictions often raise higher amounts of total revenue, not once does the Economist mention the Laffer curve, which posits that higher taxes can (i) reduce work effort, (ii) cause other inefficient distortions, and (iii) reduce the size of the tax base (thus often reducing total tax revenues).  A generic representation of the Laffer curve is as follows:

Higher taxes can cause individual taxpayers to slack off or figure out ways to report less taxable income.  But most people don't make life decisions based only on tax rates, and only the wealthiest folks can up and leave a high-tax jurisdiction (at the national level, that is - New Jersey and Maryland, among others, are losing millionaires by the yacht-load).  Thus, the "tax elasticity" in the individual case is less severe.  Corporations, on the other hand, are far more rational (i.e., driven by the bottom line) and mobile, and they therefore can, and often do, vote with their feet.  The Economist's data make these facts abundantly clear (as do myriad studies on corporate taxes in a modern globalized economy).

I'll leave it to others to question why the Economist didn't bring up the Laffer curve when the evidence so strongly points to it.  Instead, I just have one, more pointed closing question:  Why on earth does the United States have such ridiculously high corporate tax rates?  Is it because we just have too many darn jobs and too much economic growth?  Or is our economy just too darn competitive?

Or is awful ideology standing in the way of obvious and much needed tax reform?

I think the answer there is as obvious as the charts above.

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