$3 Trillion Of Low Hanging Fruit

By George Noga

The Laffer Curve also Applies to Corporate Income Taxes

On March 28 I described the Laffer Curve for individual income tax rates. It showed tax revenue is maximized at a top rate of 35%, or about where the USA is today – excluding add-on state and local taxes. Raising tax rates above this level does not yield added tax revenue.

Far less understood is the Laffer Curve is equally valid for corporate income tax rates. Therein lies a $3 trillion opportunity over the next 10 years; only anti-business ideology prevents us from picking this ripe, low hanging fruit.

“The Laffer Curve for corporate taxes shows collections
maximized at 25%; higher rates bring in less revenue.”

The US has the developed world’s highest corporate tax rate of 35% (40% with state taxes). It is 48.9% higher than the OECD average of 23.5%. Despite this rate, half again as high, the US collects far less revenue in relation to GDP than OECD countries. Our high rate costs us dearly in revenue and jobs. The Laffer Curve reveals that a lower rate of 25% (as in the Ryan plan) would collect far more revenue and gain legions of jobs.

For the past decade the US collected 2% of GDP in corporate taxes compared to the OECD average of 3%. Merely collecting the same share of GDP would gain the US $2 trillion over 10 years. Maxing our collection rate per the Laffer Curve could produce a windfall of nearly $3 trillion. Stated simply: we could raise $2-$3 trillion more while lowering the top rate from 35% to 25% and serendipitously creating millions of jobs. The Laffer Curve shows we will collect the same revenue as now by lowering the top rate 50% – all the way down to 17.5%.

“America could raise $2-$3 trillion more revenue by
lowering the top rate from 35% to 25% while
serendipitously creating millions of new jobs.”

And why, you may be wondering, don’t we simply pick this low hanging fruit? In one word: ideology! The current administration’s anti-business bias is so strong that it can’t help itself. Earlier this year when asked about lowering the corporate tax, Treasury Secretary Tim Geithner said: “We’re not going to ask Americans to pay higher taxes so we can lower taxes on business.” Really? Geithner was dissembling; he knows corporations don’t pay taxes.

Corporations Never Pay Tax – Only People Do

Obama and Geithner inhabit a parallel universe where corporations pay tax instead of people. This is reminiscent of the mythical Germanic kingdom where lemonade flows in rivers, candy grows on trees and the fattest, ugliest and stupidest man is king. If corporations truly pay tax, why not end all taxation on humans and get it all from business? Economics 101 teaches corporations (businesses) never have, do not now and never will pay tax. Businesses may collect taxes and pass them along to the government, but the money they pass on is not their money as shown by the following example.

Postulate that Greedco, Inc. currently pays $10 gazillion in taxes and government raises this to $11 gazillion; where does the extra gazillion come from? There are three possibilities, and only three possibilities; each comes at the expense of a living, breathing homo sapiens.

1. Greedco absorbs the added $1 gazillion and its profit correspondingly is reduced. Sounds good, huh? But wait, that comes at the expense of the shareholders; these are real people, mostly ordinary Americans investing through their IRAs or 401(k) plans.

2. Greedco keeps its profits the same by reducing costs. This however entails cutting personnel, all of whose vital signs still are functioning. Even if non labor costs are cut, the circle ultimately leads back to humans paying the piper.

3. The final option is for Greedco to pass the tax increase along to its customers – who are real people. This is what really happens over 90% of the time.

“The trillions we gain by lowering the US corporate tax
rate comes entirely at the expense of foreigners.”

When you hear politicians advocating higher business taxes, remember Greedco. Only humans pay taxes; businesses never pay tax. The sad part of not lowering the US corporate tax rate is that the $2-$3 trillion we would gain comes at the expense of foreigners. Yes, real humans still will bear the burden, but they would not be American humans. Moreover, we simply would be reclaiming the money foreign humans have taken from American humans by lowering their countys’ corporate tax rate – wily those foreigners.

The Corporate Tax is a Jobs Killer

The OECD states “corporate taxes are the most harmful type of tax for economic growth”. In a 2011 World Bank business survey, the US ranked 62nd in the tax category – tied with Uganda. What would you do if you owned a business that needed to build a new factory to produce goods for American consumers? Would you build in Canada with a top central government rate of 16.5% or the US with 35%? I thought so.

“Obama is sacrificing American jobs on the altar of ideology.”

The Obama administration is sacrificing American jobs on the altar of a demagogic, anti-business ideology. He refuses $2-3 trillion of desperately needed dollars of tax revenue for the same specious, socio-political reason. All Obama need do is ask and this low-hanging fruit will fall into his lap.


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