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Policy: Economy

Study finds lowering corporate income tax would boost workers' wages

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Beltway Confidential,Opinion,Sean Higgins,Taxes,Labor,Economy

A study released Tuesday by the Tax Analysis Center found that significantly reducing the corporate tax rate would also boost wages for workers and the economy overall. This could be done on a revenue-neutral basis by reducing the U.S. rate from its current 35 percent to just nine and eliminating loopholes, the study found.

The United States is notable for having one of the highest corporate tax rates in the world. The rate is 33 percent in France, 30 percent in Mexico, 23 percent in the United Kingdom, and just 15 percent in Canada, according financial advisory company Deloitte.

The study, jointly authored by Hans Fehr, Sabine Jokisch, Ashwin Kambhampati and Laurence J. Kotlikoff, says the relatively high U.S. rate causes capital flight as investors locate in countries with lower rates. Because labor isn't mobile the way capital is, the workforce suffers due the absence of this investment, since it results in fewer companies created and therefore lower labor demand. Lowering the rate would reverse this effect by keeping the capital inside the could.

This would also reduce the revenue the tax brings in. However the revenue is already severely reduced by various "explicit and implicit" corporate tax breaks. The authors argue that if the 35 percent rate were applied to all corporate income with no write-offs, it would provide "roughly 2.7 times more revenue than is actually collected."

The study games out various scenarios of reducing the corporate rate and its impacts on the broader economy. Eliminating it entirely would expand the economy overall but would not do it enough to replace the lost revenue. Reducing the rate to just 9 percent and eliminating the loopholes would be revenue-neutral, the authors conclude. At the same time, it would increase wages by 6 percent in the short term and 9 percent in the long-term as well as raise the GDP by 6 percent.

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