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Tuesday, June 03, 2008

Cut the Corporate Income Tax

Harvard economist and former Bush economics adviser Greg Mankiw provided a solid reminder on the corporate income tax in a piece for the June 1 New York Times. Mankiw showed why cutting the corporate income tax rate from 35 percent to 25 percent, as presumptive Republican presidential nominee John McCain has proposed, makes sense and would give the economy a boost.

Mankiw sums matters up this way:

Cutting corporate taxes is not the kind of idea that normally pops up in presidential campaigns. After all, voters aren’t corporations. Why promise goodies for those who can’t put you in office?
In fact, a corporate rate cut would help a lot of voters, though they might not know it. The most basic lesson about corporate taxes is this: A corporation is not really a taxpayer at all. It is more like a tax collector.

The ultimate payers of the corporate tax are those individuals who have some stake in the company on which the tax is levied. If you own corporate equities, if you work for a corporation or if you buy goods and services from a corporation, you pay part of the corporate income tax. The corporate tax leads to lower returns on capital, lower wages or higher prices — and, most likely, a combination of all three.

A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers.

Mankiw’s piece is right on target.

Well, except he goes astray at the end of the essay. Mankiw declares that if lost revenues are not made up elsewhere, such as from revenue feedback through other taxes due to faster economic growth and/or from spending cuts, then the gas tax should be increased.

Oh well, it was so close to being a great article.

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