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Trivia Tidbit Of The Day: Part 226 -- Higher Taxes, Weaker Government Revenues.

Higher corporate tax rate : Relatively less taxes collected from corporations :: Lower corporate tax rate : Relatively more taxes collected from corporations-

Need to raise money for entitlement programs, schools, national defense, and roads?

Just raise taxes, right? Wrong.

This concept will not surprise those who read WILLisms.com regularly, but the act of raising taxes is almost always a mere short-term fix. Higher taxes consistently drive down tax receipts in the medium-term and long-term.

When an additional unit of work (an hour, or day, or whatever) or output is taxed exorbitantly, it may not make much sense to do additional work or create output. High taxes also encourage creative accounting (usually totally legit) to avoid paying Uncle Sam.

Higher taxes also stifle economic growth. Lower economic growth means less commerce, less earning, less production. Ergo, lower levels of tax collections.

Interestingly, countries with higher corporate tax rates derive less of their overall tax receipts from those higher corporate taxes. Counterintuitively (for some), countries with lower corporate tax rates derive a greater share of their overall tax receipts from those lower corporate taxes.

Indeed, the Tax Foundation has the data (.pdf):

With the highest overall corporate rate in the OECD in 2005 (third highest in 2003), one would expect the U.S. to be collecting comparatively high corporate tax revenues and to be heavily dependent on them. This is not the case. In fact, during 2003 he U.S. ranked 15th in the OECD in corporate taxes collected as a percentage of total taxes collected.

The countries that rely most heavily on corporate tax receipts are Luxembourg (19.1 percent), Norway (18.5 percent) and Australia (16.7 percent). Interestingly, all three of these countries have below-average corporate income tax rates. The countries that rely the least heavily on corporate tax receipts are Germany (3.5 percent), Iceland (3.9 percent), and Sweden (5.0 percent).

Similarly, comparing corporate tax rates and corporate taxes collected as a percentage of GDP paints another picture of the inverse relationship between corporate tax rates and the robustness of corporate tax collections. Economists at the OECD demonstrated that countries with high corporate tax rates – such as the U.S., Germany, Japan, and France – tend to have lower corporate tax collections as a percentage of GDP than the OECD average.

When will this stuff stop being so surprising and counterintuitive?

Source:
The Tax Foundation (.pdf).

Previous Trivia Tidbit: Thanksgiving Factoids.

Posted by Will Franklin · 25 November 2005 11:00 AM

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