Corporate Taxes and the Laffer Curve

December 19, 2020 by Dan Mitchell @ International Liberty  

In a new documentary film, Race to the Bottom, I had an opportunity to pontificate briefly about corporate tax and the Laffer Curve.

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At the risk of understatement, I represented a minority viewpoint in the documentary. Most of the people interviewed had a negative view of tax competition, considering it to be (as suggested by the title) a “race to the bottom.”

By contrast, I view tax competition as a way of constraining the “stationary bandit” so that we don’t wind up with “goldfish government.” For purposes of today’s column, though, I want to focus on the narrower issue of the relationship between corporate tax rates and corporate tax revenue. In the above video, I asserted that lower rates did not result in lower revenue. Indeed, I even made the bold statement that revenues increased.

Is that correct?

Fortunately, I don’t need to do any elaborate calculations to prove my point. I’ll simply direct readers to the work of two left-leaning international bureaucracies. Back in 2017, I cited an article form the International Monetary Fund that included a graph clearly illustrating that the drop in tax rates has not been accompanied by a drop in tax revenue. This was a remarkable admission considering that the article argued in favor of higher tax burdens.

Likewise, last year I cited a study from the Organization for Economic Cooperation and Development that also acknowledged that falling tax rates on companies did not translate into lower revenues. Given that the OECD has a big project to increase business tax burdens, that also was a startling admission. None of this means, by the way, that lower rates always lead to more revenue.

Indeed, most tax cuts cause revenue to decline (though not as much as predicted by static estimates). The bottom line is that lower tax rates are good for economic performance and my friends on the left shouldn’t get too worried about disappearing tax revenue.

P.S. There’s also some 2017 OECD data and 2018 OECD data about business tax rates and business tax revenues.

P.P.S. Earlier this year, I cited OECD data that also included personal income tax rates and tax revenue.