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Capital Formation Newsletter
January-February, 2008, Vol. 33, N0. 1
Senate Republican Whip Assesses Outlook for Post-2010
Tax Policy
Study Shows Adverse Effect of Corporate Taxes
on Investment and Entrepreneurship
ACCF Scholar James Poterba Named New President
and CEO of NBER
ACCF in the News
154th ACCF Policy Evening Looks At The U.S.
Economic Slowdown - Have We Done Enough?
(PDF
Version)
Senate Republican Whip Assesses Outlook
for Post-2010 Tax Policy
The greatest domestic challenge we face over the next decade will
be dealing with tax policy at the end of 2010," Senator Jon
Kyl (R-AZ), the Senate Republican Whip and a senior member of the
Finance Committee, told ACCF supporters at a forum on February 13
in Washington, D.C. "We didn't have the votes to make the tax
changes we enacted early in this decade permanent. As a result,
the individual marginal rate cuts, reductions in capital gains and
dividend tax rates, and estate tax repeal, among other provisions,
will 'sunset' automatically unless we act. This would be an enormous
change in tax policy."
"If you want to foster job creation, you have to have capital,"
the Arizona senator said. "What happens if the economy is still
soft in 2010 when the tax cuts expire? You are starting the process
in a big hole."
ACCF President and CEO Mark Bloomfield, left, and
Senate Republican Whip John Kyl at the ACCF forum. |
Senator Kyl said he did not believe the Democrats would initiate
legislation to make the expiring tax cuts permanent but the budget
process could be used to extend the cuts temporarily. "We need
to set our sights on extending the most important provisions but
we will never prevail in this without a good intellectual rationale,"
he added. Senator Kyl praised the ACCF's credible and effective
research over the past three decades that demonstrates that low
tax rates on capital gains, dividends, and other pro-capital formation
tax provisions reduce the tax burden on saving and investment and
promote economic growth, job creation, and a higher standard of
living. "We need to make sure people buy into this concept
and put aside the idea of class warfare that is so often associated
with reducing taxes on saving," he stressed.
Turning to a more immediate tax policy concern, Senator Kyl told
ACCF supporters and their guests that the tax stimulus package approved
by Congress and signed into law by President Bush adds to the country's
debt burden and restricts our ability to enact other, more effective
tax cuts. "I voted against the tax stimulus package because
we are not in a consumer-driven economic downturn. Other factors,
in particular the problems in the subprime market, are at work.
The current economic situation is not one you can solve by increasing
spending on consumption," he explained.
"We have a tough row to hoe now. I commend the ACCF for its
leadership on developing the intellectual arguments that are a predicate
for the political acceptance of tax policies that promote growth
in our economy. We will never reach our goals if our people don't
understand and articulate the case for reducing the tax burden on
capital and shaping public policies in a pro-capital formation direction,"
Senator Kyl concluded.
Study Shows Adverse Effect of Corporate
Taxes on Investment and Entrepreneurship
Introduction
The adverse effect of corporate taxes on both domestic investment
and entrepreneurship was the focus of a recent National Bureau of
Economic Research (NBER) study, The Effect of Corporate Taxes on
Investment and Entrepreneurship (1).
Methodology
The NBER study analyzed a standardized case study of a business
called "TaxpayerCo." In collaboration with PricewaterhouseCoopers
accountants and tax lawyers, the authors constructed a data set
incorporating local, state and federal taxes on corporations. Using
the financial statements of this simulated business for fiscal year
2004, effective tax rates were calculated for 85 countries consisting
of both high- and low-income nations. Since "TaxpayerCo"
is a new business, the authors calculated both first and fifth year
effective tax rates taking into account depreciation allowances
and other deductions.
Results
The study's results revealed a consistent adverse effect of corporate
taxes on investment. According to the study, a 10 percentage point
increase in the first year effective corporate tax rate decreased
the aggregate investment-to-GDP ratio by about 2 percentage points.
(See Figure 1, above.) The results were similar when the fifth year
effective corporate income tax rate was included.
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The authors constructed another data set that enabled them
to test the effect of corporate taxes on entrepreneurship.
This new data set included information on business density
(number of businesses per 100 workers) and a new 62 country
data set on firm entry (number of newly registered firms as
a percentage of the stock of firms). Their results indicated
that a 10 percentage point increase in the first year effective
corporate tax rate decreased the "start up" rate
for new companies by 1.4 percentage points.
The study also examined the effects of corporate taxes on
other important variables and concluded that a higher effective
corporate income tax rate is associated with lower economic
growth. Specifically, the study estimated that a 10 percentage
point increase in the first year effective corporate tax rate
decreased the growth rate by 1 percentage point per year.
In addition, a 10 percentage point increase in the first year
effective corporate tax rate increased the informal economy
("off the books" companies) as a share of economic
activity by 2 percentage points. Consistent with previous
research, taxes were one of the main determinants of the size
of the informal economy (from which it is difficult to collect
taxes or enforce regulations).
Finally, the paper analyzed the effect of the corporate tax
on the choice of debt versus equity financing. The results
indicated that a 10 percentage point increase in the first
year effective corporate tax rate raised the debt-to-equity
ratio by 45 percentage points. Since interest payments are
tax deductible, it is no surprise that companies in countries
with higher effective corporate tax rates prefer debt financing.
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The U.S. Corporate Tax Rate versus Our Trading Partners
Among OECD countries only Japan has higher combined corporate income
tax rates than the United States. (See Table 1). Furthermore, eight
OECD countries have already reduced their corporate tax rates further
starting in 2008.
Conclusions
The authors of the NBER study concluded that government tax and
regulatory policies may have large consequences for the business
environment as well as for economic development. U.S. policymakers
may find this report useful as they focus on the dual challenges
of increasing domestic economic growth as well as enhancing the
international competitiveness of U.S. multinational companies.
(1) The NBER study, The Effect of Corporate Taxes on Investment
and Entrepreneurship (Working Paper 13756, January 2008), was conducted
by Simeon Djankov, Caralee McLiesh, and Rita Ramalho of the World
Bank and Tim Ganser and Andrei Shleifer of Harvard University.
ACCF Scholar James Poterba Named New President
and CEO of NBER
Professor James Poterba |
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Dr. James Poterba, a member of the Board of Scholars of the
ACCF Center for Policy Research, was selected as the next
president and chief executive officer of the National Bureau
of Economic Research (NBER). NBER is a nonpartisan research
organization dedicated to promoting a greater understanding
of the economy. Dr. Poterba is the Mitsui Professor of Economics
and the head of the Economics Department at Massachusetts
Institute of Technology. He also is the current director of
the Public Economics Research Program at NBER. Dr. Poterba
has served as director of the American Finance Association
and was a member of the Executive Committee of the American
Economic Association. In 2005, he was a member of the President's
Advisory Panel on Tax Reform.
Dr. Poterba's research focuses on how taxation affects economic
decisions of households and firms, with an emphasis
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on the effect of financial behavior of households, particularly their
saving and portfolio decisions. He has been especially interested
in the analysis of tax-deferred retirement savings programs, such
as 401(k) plans, and the role of annuities in financing retirement
consumption.
ACCF in the News ...
ACCF
Calls for Making Capital Gains, Dividend Tax Cuts Permanent
"Congress must make a larger commitment to tax relief if it
is to save the nation from recession and job loss," ACCF Senior
Vice President and Chief Economist Margo Thorning wrote in an op-ed
on February 8, 2008 in the Fort Worth Star-Telegram. "Their
to-do list for economic renewal should start with making the current
tax rates for capital gains and dividends permanent." To
read the op-ed, click here.
Fox Business News"
Highlights ACCF Views
As Washington policymakers and thought leaders debated the makeup
of a fiscal stimulus package, ACCF Senior Vice President and Chief
Economist Margo Thorning appeared as an invited guest on Fox Business
News on January 24 and 31, and February 8, 2008. Dr. Thorning discussed
the importance of maintaining low tax rates on capital gains, restraining
the growth in entitlement spending, and avoiding climate change
policies that slow U.S. economic and job growth. To
see a video clip, click here.
Investor's
Business Daily Editorial Cites ACCF Tax Stimulus Study
"As economist Allen Sinai has noted in a study for the American
Council for Capital Formation, (the 2001 and 2003 tax cuts) added
2.5% to GDP in 2004 alone," Investor's Business Daily observed
in its analysis of the stimulus plan agreed to by the White House
and congressional Democrats in an editorial, "Enough to Get
By," on January 24, 2008. To
read the Investor's Business Daily editorial, click here.
BBC World"
Hears ACCF Perspective
ACCF President and CEO Mark Bloomfield was interviewed on January
18, 2008 by "BBC World" on the outlook for the U.S. economy
and the prospects for enactment of a pro-growth economic stimulus
package. "BBC World" is the BBC's commercially funded
24-hour news and information channel broadcast in more than 200
countries and territories across the globe. With an audience of
some 76 million, it is the BBC's biggest television service. To
see the video, click here.
154th ACCF Policy Evening Looks At The
U.S. Economic Slowdown - Have We Done Enough?
Leading members of Congress, journalists from top publications,
and prominent business leaders came together on February 26, 2008
for the 154th ACCF Economic Policy Evening. Pictured at the session,
left to right, are: 1) James C. May, president & CEO, Air Transport
Association of America, Inc.; Sen. Ron Wyden (D-OR); and Mark Bloomfield,
ACCF president & CEO; 2) Hon. John Engler, president & CEO,
National Association of Manufacturing, and Gen. Jack W. Klimp, CEO,
AHRI; 3) Dr. Margo Thorning, ACCF senior vice president and chief
economist, and Rep. Dennis Moore (D-KS); 4) Jessica Holzer, staff
writer, The Hill; Jonathan Weisman, congressional reporter, The
Washington Post (foreground); Karl J. Ottosen, Ottosen and Associates;
Ronald D. Clements, managing director, Governmental Affairs, and
senior director, Tax Policy, Edison Electric Institute; and Sen.
Robert Bennett (R-UT); 5) Lauren Kerr, Issues Advisor, ExxonMobil
Corporation; M. Thomas Davis, staff vice president, Strategic Planning,
General Dynamics Corporation; Donna A. Harman, president & CEO,
American Forest & Paper Association; and Thomas M. Smith, vice
president and director of Taxes, Weyerhaeuser Company; and 6) J.
Stephen Larkin, president, The Aluminum Association; Rep. Phil English
(R-PA); and Dr. Thorning.
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