Over on Twitter, my friend and UCLAW colleague Adam Winkler has been tweeting about corporate taxes:
In theory, the USA has "the second-highest statutory combined corporate tax rate – 39.2 percent – after Japan’s rate of 39.5 percent" among the OECD countries (link). In principle, this could make US firms less competitive than firms in key economic competitors.
In practice, however, the USA generally has been at or below the OECD average when one looks at corporate tax revenue as a percentage of GDP (link).
In addition, as Adam correctly notes, many US corporations don't pay corporate taxes in many years. Of course, those corporations' CFOs don't just wake up one morning and decide not to pay taxes. The actual tax rate paid by corporations depends not just on the nominal marginal rate table, but also on the deductions and credits Congress has put into the tax code. (So when liberals complain about corporations not paying taxes, they need to direct those complaints to Congress and the White House. The latter, after all, are the ones that wrote the tax code.)
Corporate tax pork has many disadvantages. It encourages firms to expend resources on rent seeking rather than productive economic activity. It favors established firms/industries, who typically pay lower tax rates than newer firms/industries with less political capital. As Cato wrote a while back:
... targeted tax breaks are certainly bad policy. Because they provide special treatment for politically powerful industries, such tax breaks run counter to the notion that all taxpayers should be treated the same.
Furthermore, targeted tax breaks create distortions in the workings of the economy. Government steps in and creates an uneven playing field by granting tax breaks to particular industries. As a result, our economy's resources do not go toward their most efficient use, which makes it more difficult for America's businesses to be successful.
A plan that eliminates targeted tax deductions and credits, while simultaneously reducing marginal corporate tax rates so as to be revenue neutral, would thus be an ideal two-fer: It would create a domestic level playing field, while also making US corporations more competitive with global counterparts.
Unfortunately, as public choice theory makes clear, Congress "profits" by selling targeted legislation to powerful firms/industries. Congress simply has no incentive to adopt rational economic policies. And that's true whether the Democrats or the Republicans are in charge.
