The 2020 Mid-Year Economic Update_long

Is the Corporate Tax Rate Hurting U.S. Business?

MAPI report analyzes the benefits that could come with rate cuts.
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Is the corporate tax rate in the U.S. hurting U.S. business? According to a recent report from the Manufacturers Alliance for Productivity and Innovation (MAPI), it may be.

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In the report, The Benefits of Reducing Corporate Taxes: Lessons from Canada, Jeremy Leonard, MAPI economic consultant, points to Canada as a prime example of how cuts to corporate tax rates can pay big dividends – and not just for the companies.

Since 2000, Canada has slashed the federal statutory rate nearly in half while the U.S. rate remained unchanged. As a result, the combined federal-provincial rate in Canada is just over 25 percent, compared to over 40 percent in the U.S.

“Comparisons of effective marginal tax rates on capital, which take into account differences in depreciation, inventory deductions, and other elements affecting the tax base, yield essentially the same conclusion: a 15 percentage-point advantage in favor of Canada,” Leonard said. “There was no drop-off in Canadian revenues in the wake of corporate tax cutting in the 2000s. The peak-to-peak increase in corporate tax revenues during the 2000s expansion was 44 percent, and revenues’ share of GDP actually increased relative to the 1990s to exceed the U.S. level.”

How does cutting the tax rate increase tax revenue? Because businesses change their behavior to make additional investments, Leonard says, which translates to more economic activity and profits and an increased taxable base of corporate income. Another benefit? More activity often means more jobs.

If the U.S. doesn't address the growing disparity in corporate tax rates, it may face even more challenges to economic expansion, Leonard says. “We are falling behind by standing still."

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