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Monday, August 31, 2009

New Study Shows Devastating Impact of High Corporate Tax Rates

The Tax Foundation, came out with a new study this month on the negative impacts of high state corporate tax rates. The results have coincided with previous research, showing that states with lower corporate income tax rates substantially boost their worker productivity and real wage rates. Given that Pennsylvania has the 2nd highest corporate taxes in the nation, the findings strongly suggest we should reconsider our corporate tax rates.

According to the study, "between 1970 and 2007, a one-dollar increase in the average state-local corporate tax rate caused a $2.50 dip in wages 5 years later, compared with lower-taxed states." The reverse is also true; a one-dollar decrease in the corporate income tax this year would bring a $2.50 increase in real wages 5 years later. With the state budget at an impasse, some lawmakers are suggesting the opposite; actually delaying a reduction in the Capital Stock and Franchise tax in a desperate attempt to fill the budget gap. Delaying relief for Pennsylvania businesses hoping to climb out of this recession could prove to be a disastrous mistake.

1 comment:

Elizabeth A. Male said...

This study and the budget impasse present a perfect opportunity to expose and dispel some widely held beliefs about corporate taxation.

Myth No. 1: Taxing corporations alleviates the tax burden of individuals and families. That is FALSE. The corporate tax is ultimately paid by people. Taxing corporations does NOTHING to alleviate the tax burden borne by individuals, rather it simply transforms the tax into a component of price, a reduction of opportunity/salaries/benefits, or a reduction of return on investment. It provides deceitful and unscrupulous politicians with a means by which to hide the true tax burden from the electorate.

2. Myth No. 2: Taxing corporations is necessary to assess them for the municipal services consumed. That is FALSE. The conduit that conveys taxes imposed at the corporate level down to the people is in fact a two-way street. The people who comprise the corporation reach up and through the corporate shell to demand services directly. The corporate minute book does not ride the bus to work. The corporate minute book does not walk on the sidewalk, call the fire department, the police or generate any trash. The people who comprise the corporation engage in those activities. It is therefore appropriate to tax them directly for the services consumed while at work.

Myth No. 3: Equity demands that we tax capital and labor at the same rates. That is FALSE. Taxing capital only slows economic activity and reduces the amount available for investment in new wealth generating ventures. Taxing capital is analogous to eating your seed corn.

Pennsylvania has an opportunity here to lead by example. We should eliminate all corporate level taxes, place the total tax burden on the people in a direct and transparent form, and amend our constitution to prohibit any future taxation of business entities. We would then be THE destination for business and we would begin to generate true wealth, not the ersatz wealth borne of "economic development" spending.