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June 06. 2013

Myth Buster: High corporate tax rate doesn’t impact economic growth

By: ACT Staff

A report surfaced this week making the assertion that corporate taxes don’t affect economic growth. This could not be further from the truth. The fact is – when you tax something, say business investments, it makes it harder to grow and invest, resulting in less economic growth.  But you don’t need to take our word for it – economists, reporters and the activities of our foreign competitors all indicate that this is just not an accurate analysis.

The Organization for Economic Cooperation and Development (OECD), a multilateral government organization, says the corporate income tax is the most inhospitable to economic growth:

Corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and productivity improvements.

The economics literature overwhelmingly finds that economic growth is harmed by corporate taxes. As The Washington Post’s Dylan Matthews observes, even the author of the report, when previously employed by the Congressional Research Service, criticized the corporate income tax, stating “The traditional concerns about the corporate tax appear valid. While many economists believe that the tax is still needed as a backstop to individual tax collections, it does result in economic distortions.”

The rest of the world understands the enormous benefits to their economies made possible by a globally competitive corporate tax system. Since 2000, 30 of the 34 OECD countries have reduced their corporate tax rates.

In cutting corporate tax rates, these governments have made it clear they seek to achieve an economic advantage.  The government of the UK, with a corporate tax rate scheduled to fall to 20%, has declared “The Government wants to send out the signal loud and clear that Britain is open for business.”  Canada, with a 15% federal corporate tax rate, has undertaken corporate tax reform, in the words of the Canadian government, “to create a meaningful tax advantage over the United States, our closest economic partner.”

American companies and American workers are disadvantaged by our outdated tax system.  Comprehensive tax reform including a 25% corporate tax will lead to increased jobs and investment in the United States.  In today’s highly competitive global economy, tax reform is essential to economic growth.