HIGH CORPORATE TAX WEDGE HURTS COMPETITIVENESS

Here is the demonstration of the Laffer Curve in the case of corporate tax and business taxation. The international evidence shows a negative empirical correlation between corporate tax revenues and corporate tax rates, meaning that higher the rate, lower the revenue and vice versa. High corporate tax rate stimulates tax avoidance while lower corporate tax rate means more transparency and much lower costs of hiding company revenue away from the government. Nevertheless, international tax competition has forced policymakers to slash the corporate tax rates throughout the globe. The U.S., by contrast, with its near 40% rate has been averaging less than 2.5% of GDP in corporate receipts. Ireland which seems to be on the correct side of the curve, has a 12.5% corporate rate, nearly the lowest in the world, and yet collects 3.6% of GDP in corporate revenues, well above the international average. In Iceland, Laffer curve has worked incredibly well. Lower corporate tax rate also yielded higher revenue, showing how lower rates lead to more revenue from taxes.


Source: We're Number One, Alas, Wall Street Journal, July 13, 2007; Page A12