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9% Corporate Flat Tax Would Raise Wages, Boost GDP

By Hal M. Budrick

NEW YORK (MainStreet) Talk of a flat tax is back, but this time as a replacement to the current corporate income tax structure. Replacing the 35% corporate income tax with a flat tax rate of 9% is a strategy floated by the nonprofit Tax Analysis Center that promises to produce "rapid and dramatic increases in the level of U.S. investment," increase worker wages, boost GDP and maintain existing tax revenue.

"Most people think the corporate tax hits the rich, whereas most economists think it hits workers," says coauthor Laurence Kotlikoff, director of the Tax Analysis Center and professor of economics at Boston University. "The study confirms this. It shows that American workers are big winners under a 9% corporate flat tax. Lower corporate tax rates mean dramatically more corporate investment in the U.S. and that means significantly higher wages."

According to the center's model, a 9% corporate flat tax would:

  • Immediately and permanently raise GDP by roughly 6%
  • Increase capital stock by 17% in the short run and by 30% by 2040
  • Increase wages about 6% in the short term, eventually increasing by 9%

Kotlikoff says the lower corporate tax rate could be achieved by eliminating loopholes in the current system, including accelerated depreciation, bonus depreciation and deferring foreign-earned income.

The study cites the effects of the so-called "Irish Miracle" of the late 1980s. In 1987, Ireland began cutting its 50% corporate tax rate, ultimately reaching a rate of just 12.5% in 2003. As a result, the country experienced a massive inflow of investment, luring over 1,000 multinationals including Motorola, Dell, Wyeth, Intel, Microsoft, IBM, Citigroup, and Bristol-Myers Squibb.

Between 1987 and 2007, Ireland's GDP growth rate averaged 6.4% per year, compared to a rate of 3.7% per year between 1971 and 1987.

"The current high corporate tax rate keeps capital outside the country," adds Kotlikoff. "With less capital, our output is lower and so are workers' wages. Our country has a historically low rate of net domestic investment. It's time to turn this situation around."

The Tax Analysis Center performed multi-model tax simulations comparing the economic impact of alternative revenue-neutral corporate tax reforms, featuring skilled and unskilled labor and the fiscal policies of five regions: the U.S., Europe, Japan, China and India.

--Written by Hal M. Bundrick for MainStreet

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