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Recovery? Revisit the Corporate Tax.

On Thursday, economists at the New York Fed released a report forecasting sluggish economic growth this year, due to the government’s fiscal policy.  This should be no surprise since the prevailing anti-business attitude in Washington is producing policies that are impeding economic growth. One such policy is the U.S. corporate tax, which stands at 40% combining both federal and average state taxes, making it two-thirds higher than the global average.  By taxing its businesses more than any other nation, the U.S. is putting itself at a severe competitive disadvantage. Businesses respond to incentives, and if you punish productivity and investment by high taxes you are encouraging businesses to leave. By substantially reducing and simplifying them the U.S. can unleash its entrepreneurial spirit once again and get the economy growing.

Many counter that the effective tax rate on corporations is much lower than 40% because of exemptions and deductions. While that is partly true, such exemptions and deductions introduce tremendous complexities that use a corporation’s time and money on paperwork instead of producing actual wealth. It also fosters crony capitalism in which businesses are encouraged to use resources to lobby for special tax breaks for their business. Without such a complex system, business lobbying will be replaced with activities that create, not fight over, wealth. 

Contrary to politicians’ beliefs, these corporate taxes are not paid by the wealthy; they are paid by you and me. When taxes are raised, corporations’ costs rise, and for firms to maintain profitability they have to lower wages and raise prices. A study conducted by the Tax Foundation found that the average household burden of the corporate tax was over $3,100, with lower-income urban areas being affected more heavily.  This means that the poor, not large businesses or wealthy CEOs, bear the brunt of the burden. So when politicians say we need to make corporations pay their “fair share,” in actuality, that means you and I must pay more. 

The key to creating jobs and gaining economic growth is to allow important investments, businesses and ideas to flourish. Take Wal-Mart, for example, which is the third largest employer in the world  and the provider of a great variety of low cost products that other competitors can’t match. That makes us as consumers and the 2.1 million employees better off.  

Substantially lowering the U.S. corporate tax is a critical step to jumpstarting the U.S. economy and providing for long-term growth. Entrepreneurs will have an easier time starting businesses, employers will better be able to hire workers, and foreigners will see the U.S. as a better place to invest. Roger H. Gordon from the University of California, San Diego and Young Lee from Hanyang University in South Korea found that a ten percent cut in the corporate tax rate would raise the annual economic growth rate by one to two percent.  Considering the average GDP growth rate for our economy over the last five years has been 0.6% , this would create substantial long-term growth. 

If politicians are serious about economic recovery, they will revisit lowering and simplifying the U.S. corporate tax because it is arguably the easiest and most effective way of creating a true economic recovery.