Time to Fire America's Management; Corporate Income Tax Cripples the Economy

The Washington Times (Washington, DC), July 14, 2010 | Go to article overview

Time to Fire America's Management; Corporate Income Tax Cripples the Economy


Byline: Richard W. Rahn , SPECIAL TO THE WASHINGTON TIMES

Assume you own stock in a company whose market share has fallen from approximately

one-third of the industry 15 years ago to only one-quarter today, the company was racking up record losses and debt, and the management has proposed increasing the prices of its products while many competitors are cutting their prices. Would you vote to fire the management? Rather than a company, the entity I have just described is the United States. The U.S. has been losing market share as a percentage of global gross domestic product, in part, because many competitors, particularly in Asia, have been leading with pro-growth economic policies while the U.S. is piling more taxes and regulations on the productive sectors of its economy.

Most economists understand that the corporate income tax is one of the most destructive forms of taxation because it is an additional tax on the factors of production, capital and labor. There have been many studies of the evils of the corporate income tax, yet the politicians in Washington have saddled the U.S. with the highest effective corporate tax in the world - even higher than in France, Germany or any other country in the European Union. Now, a new, very comprehensive peer-reviewed study of the effects of the corporate income tax, using data from 85 countries, has been published in the July issue of the American Economic Journal.

The authors (Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho and Andrei Shleifer) conclude that effective corporate tax rates have a large and significant adverse effect on corporate investment and entrepreneurship. They go on to say: Higher effective corporate income taxes are also associated with lower investment in manufacturing but not in services, a larger unofficial economy, and greater reliance on debt as opposed to equity finance. In these new data, corporate taxes matter a lot, and in ways consistent with basic economic theory. (If you tax something, you get less of it.)

Many of the members of Congress who consistently wail about the loss of U.S. manufacturing jobs are the same ones who, time and time again, vote to crush U.S. companies with more taxes and regulations. Congress already has voted for one increase in the capital gains tax this year (in the health care legislation bill) and is poised to let the George W. Bush capital gains rate cut expire at the end of this year, making the U.S. even more uncompetitive. There have been a series of recent studies showing that an increase in the capital gains tax will cost the government revenue and lead to less employment and lower economic growth - but Congress seems hellbent on heading in the wrong direction. …

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Time to Fire America's Management; Corporate Income Tax Cripples the Economy
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