Eliminating the Corporate Tax Would Increase Real Wages

Laurence J. Kotlikoff, Director of the Tax Analysis Center and Professor of Economics at Boston University, looks at what the effects of replacing the corporate tax rate would be on GDP, workers, and capital. Corporate taxes are generally accepted by economists as the tax most detrimental to the economy. Dr. Kotlikoff lays out the benefits of three versions of corporate tax reform for the National Center for Policy Analysis.

Our analysis shows that eliminating the U.S. corporate tax — holding constant the corporate tax rates of other countries — would produce a rapid and dramatic increase in domestic investment, GDP, real wages and national saving. We analyzed two alternatives to make up for the revenue: a 3.4 percent tax on wages or consumption. We also modeled a reduction in the corporate tax to 9 percent and broadening the tax base by eliminating loopholes.

Economic Effects of Replacing the Corporate Tax. Abolishing the corporate tax produces permanent economic benefits.

  • The capital stock would increase by one-fourth to about one-third (23 percent to 37 percent) — with most of the added investment reflecting capital flowing into the United States.
  • Real wages would rise 12 percent to 13 percent.
  • Gross domestic product would rise 8 percent to 10 percent.

Further, the tax base would expand over time, producing additional revenues that would make up for about one-third of the revenue loss from repealing the corporate tax. Over time, due to economic growth, the tax rate required to replace corporate tax revenues would fall.

The beneficial economic effects of a consumption tax are somewhat greater than a wage tax, as are the long-run welfare gains for individuals.

Read the full report at National Center for Policy Analysis.