Economic Reality Check
Critiquing three popular claims about housing, spending, and taxes.


Throughout the industrialized West, VAT revenue has made it easier for governments to slash corporate taxes and thereby lure investment. Such tax cuts have been encouraged by the increasing mobility of capital. “The United States has entered a new era of global competition for multinational activity,” declared a 2010 McKinsey Global Institute study. Regrettably, America is saddled with the second-highest combined statutory corporate-tax rate in the OECD. It’s true that the statutory rate is steeper than the average rate paid by U.S. companies, thanks to a bevy of deductions, credits, and other tax expenditures. But the cost of these expenditures is often overblown, and University of Calgary economists Duanjie Chen and Jack Mintz have shown that, if we exclude the temporary “bonus depreciation” tax break, America had the OECD’s highest effective corporate-tax rate on new investment in 2010.

What about the total tax rate firms pay as a share of their commercial profits? As of May 2011, that rate was higher in the United States (46.7 percent) than in Norway (41.6 percent), the Netherlands (40.5 percent), Finland (39 percent), Spain (38.7 percent), the United Kingdom (37.3 percent), New Zealand (34.4 percent), Switzerland (30.1 percent), South Korea (29.7 percent), Canada (28.8 percent), Denmark (27.5 percent), or Ireland (26.3 percent), according to the World Bank and PricewaterhouseCoopers. Those same two institutions report that it is more onerous to pay business-related taxes in America than in France, Australia, Sweden, or any of the aforementioned countries.

A 2008 OECD paper determined that corporate taxes are “most harmful for growth, followed by personal income taxes, and then consumption taxes.” That insight should be the lodestar of U.S. tax-reform efforts. America’s corporate-tax regime hinders capital formation, suppresses wages, and promotes excessive leveraging on Wall Street (through its disparate treatment of equity and debt). It also incentivizes U.S. multinationals to keep their foreign profits abroad. As for tax fairness, Berkeley economist Laura Tyson explains that a high corporate-tax rate is “increasingly ineffective as a tool to achieve more progressive outcomes in the taxation of capital and labor income.” The reason? “Workers are bearing more of the burden,” owing to the enhanced mobility of capital.

Milken Institute economist Ross DeVol believes that slashing the federal corporate-tax rate from 35 percent to 23 percent is “the single most important thing the U.S. can do to jump start job creation.” It certainly would help narrow America’s present investment gap. Nonresidential fixed investment went up by 27 percent over the two years immediately following the 1981–82 recession, but it grew by less than half that amount (12 percent) during the two years after the 2007–09 recession, according to Harvard economist Greg Mankiw. Those figures underscore the necessity of sharply reducing our corporate-tax rate, if not eliminating the tax altogether. A VAT could help make that happen.

Plenty of right-leaning economists have offered a qualified endorsement, including Nobel laureate Gary Becker of the University of Chicago and Robert Barro of Harvard. Becker has said he would support introducing a VAT as part of a radical, 1986-style tax reform that trimmed marginal rates and simplified the entire system. Likewise, Barro has proposed a 10 percent VAT as one element of a broader fiscal-overhaul package that also abolished the corporate-income tax. If our long-term goal is to catalyze greater saving, increase the GDP share of investment, and discourage the type of debt-fueled consumption we witnessed during the housing bubble, these ideas should definitely be on the table.

— Duncan Currie is a writer in Washington, D.C.