Thursday, December 16, 2010

Reflections on Corporate Taxes (part I)

Fewer areas of policy are as misunderstood as our vast, byzantine tax code. This is particularly troubling because tax policy has a major impact on our economy, particularly in the creation and increasingly the exodus of jobs in the United States.

Ask most Americans for their thoughts on the tax code and many will declare that "corporations do not pay their fair share of taxes." This appeals to me on an intuitive level, however a closer look at the tax code shows that these sentiments are flawed. To start off with, the United States now has the dubious title of having the highest corporate tax rate in the developed world. I do not have any innate sympathies for large corporations, however as capital and production have become increasingly mobile, our comparatively high tax rate has accelrated the departure of manufacturing jobs from the United States.

A key component to maintaining domestic and attracting foreign investment (which is key to job creation) is to lower the corporate tax rate. This is anathema to most progressives, who are more inclined to turn to tariffs, which work quite well, at least until our trading partners decide to retaliate with tariffs of their own. In other words, "tax carrots" are generally more effective than "tariff sticks."

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