It’s time to eliminate the US corporate income tax


 Dr.Laurence J. Kotlikoff  is  William Fairfield Warren Professor and Professor of Economics, Boston University

 He has a B.A. in Economics degree, University of Pennsylvania; and a PhD. in Economics, Harvard University

This article is published here by permission of Stratfor (

Though taxing corporations may be a political no-brainer, it may be a big economic mistake. This column discusses recent research showing that the tax is not paid primarily by rich corporate shareholders. They can, and do, move their capital away from countries that have high corporate rates. Eliminating the US corporate tax by, for example, taxing accrued global corporate profits as personal income can produce dramatic increases in US investment, output, real wages, and saving. Modest gains accrue to early generations with very sizable gains going to young and future generations, both skilled and unskilled.

Perhaps the most maddening aspect of America’s dangerous government’s political infighting is the failure of politicians in both parties to agree to reforms on which they agree. Take, for
example, taxing wealth, and taxing consumption. Many Democrats would love to enhance tax progressivity by taxing wealth and lowering taxes on workers. In contrast, Democrats think retail sales taxation is the most regressive tax around. For their part, many Republicans would applaud switching from wage to retail sales taxation, but would be appalled by wealth taxation. Economists know replacing wage taxes with a consumption tax – whether implemented as a retail sales tax or otherwise – is equivalent to taxing wealth and using the proceeds to lower taxes on wages.

The wealth tax hidden in the retail sales tax

To see the wealth tax hidden in the retail sales tax, consider the legendary Uncle Scrooge McDuck swimming in a pool full of 50 billion $1 bills. Were the US government to enact today, say, a 34% retail sales tax, it would remove none of Uncle Scrooge’s precious greenbacks from his pool. But it would reduce their purchasing power by 25%, since it would now take 1.34 of these dollars to buy what cost $1 dollar yesterday.

Scrooge, being Scrooge, has no interest in spending his money. Instead, he’d likely bequeath all 50 billion pieces of paper to his nephew Donald Duck who would inherit less real wealth – namely, 25% less purchasing power. In other words, neither Scrooge nor Donald can escape the immediate, if implicit wealth tax arising from retail sales taxation by leaving their money to their heirs.

It’s easy to show mathematically that consumption taxation is equivalent to taxing wealth on a one time basis, and wages on an ongoing basis. The only difference between the two is in the choice of words used to describe their equivalent effects. Any wealth tax used to lower taxes on wages could be implemented as a consumption tax, coupled with a cut in wage taxes. Indeed, the former policy could simply be relabeled as the later policy, since they are equivalent. Perhaps we could get Democrats and Republicans to agree on this policy by writing the law in Russian, and letting each party translate the law in their preferred fiscal language.

Politicians mistake language for economic substance routinely. No surprise. Of the 535 members of Congress, not one has a PhD in Economics.

Gains from eliminating the corporate tax: New evidence

When it comes to corporate tax reform, the true incidence of who bears the tax is also lost in the words. Most people, regardless of political party, think the corporate income tax is primarily paid by rich corporate shareholders. But this is not necessarily the case (Felix and Hines 2009, Kotlikoff et al. 2013). In particular, a recent large-scaled dynamic simulation study, entitled “Simulating the Elimination of the US Corporate Income Tax,” (Kotlikoff et al. 2013) strongly suggests otherwise. As I discussed in a recent NY Times column (Kotlikoff 2014), corporate shareholders can, and do, move their capital and production away from countries that impose high corporate income tax rates to countries that impose low corporate income tax rates.

Our paper simulates corporate tax reform in the US and abroad, including the complete elimination of the US corporate income tax. The model features a single good produced in five regions – the US, Europe, Japan (plus Korea and Taiwan), China, and India – with skilled and unskilled labor. It also closely models demographics, including age-specific birth and death rates, as well as each countries’/regions’ fiscal policy.

We find that:

• Eliminating the US corporate income tax with no changes in the corporate tax rates of the other regions can produce rapid and dramatic increases in US domestic investment, output, real wages, and national saving.

• These economic improvements expand the economy’s tax base over time, producing additional revenues that make up for a significant share of the loss in receipts from the corporate tax.
The simulated economic gains from eliminating the corporate tax – while insufficient to fully finance the corporate tax cut (i.e., there is no Laffer Curve, per se) – are large enough to produce a Pareto improvement. Modest welfare gains accrue to early generations, both skilled and unskilled, and very sizable welfare gains go to young and future generations, both skilled and unskilled.

Importantly, these gains arise naturally with no special compensation mechanism required to transfer from winners to losers.

  • Stated differently, the elimination of the US corporate income tax has the potential to be a win-win for all US generations.

These results are predicated on three assumptions – that taxes on wages, levied with the same degree of progressivity as current US wage taxes, are used to offset the loss in corporate tax revenues, that the US marginal effective corporate income tax rate is 35%, and that the US average effective corporate income tax rate is 13%.

Source of the Pareto gains: Corporate tax’s inefficiency

Relying on higher consumption taxes to offset the loss in corporate taxes leads to even larger long-run welfare gains, albeit at the price of small welfare losses to initial older generations. The difference between the 35% marginal effective US corporate tax rate, recently estimated by Mintz and Chen (2013), and the 13% average tax rate, suggested by the US National Income Accounts, tells us an important fact.

• A substantial share of the corporate tax’s distortionary impact – namely, dissuading investment in the US – comes with no gain in terms of extra revenue.
This makes the tax particularly inefficient, and helps explain the scope for a Pareto improvement. For example, when wage taxation is used as the substitute revenue source, eliminating the US corporate income tax, holding other countries’ corporate tax rates ?xed, engenders a rapid and sustained 23% to 37% higher capital stock, depending on the year in question, with most of the added investment re?ecting capital in?ows in response to the US’s highly favourable corporate tax climate.
Higher capital per worker means higher labour productivity and, thus, higher real wages. Indeed, in the wage-tax simulation, real wages of unskilled workers end up 12% higher, and those of skilled workers end up 13% higher.

There is some question in the literature about the magnitude of the US marginal corporate tax rate. Devereux and Bilicka (2012) put the rate at 23%, not at 35%. Our paper produces smaller, but still substantial, economic gains, and a Pareto path assuming a 23% rate. Importantly, we also find substantial, if smaller, gains to US workers – particularly young and future workers – if other countries match the US and also eliminate their corporate income taxes.

Concluding remarks

Eliminating the corporate income tax could be implemented ( as part of corporate tax integration in which shareholders are required to pay tax at the personal level on their shares of their companies’ profits as those profits accrue.
In short, if Democrats and Republicans started thinking about what they want, not what they want to hear, we could begin making substantive tax reforms in the US that would make both sides happy.


Bilicka, K and M Devereux (2012), “CBT Corporate tax ranking”, Said Business School, Centre for Business Taxation, University of Oxford, June 2012

Chen, D and J Mintz (2013), “2013 annual global tax competitiveness ranking: Corporate tax policy at a crossroads”, The School of Public Policy Research Papers, Vol.6, Issue 35, University of Calgary

Fehr, H, S Jokisch, A Kambhampatic and L Kotlikoff (2013), “Simulating the elimination of the US corporate income tax”, NBER Working Paper No. 19757, December 2013

Felix, A and J R. Hines, Jr (2009), “Corporate taxes and union wages”,, 14 December

Kotlikoff, L (2014), “Abolish the corporate income tax”, NY Times, 5 January



Garske 3Mr. Joseph P Garske is a retired private investor. He is an invited contributing writer to the He holds a bachelor degree in history from Harvard.


One of the most important public figures in our world today is Jurgen Habermas of the Frankfurt School in Germany. Though perhaps little known in the United States he wields immense influence in the affairs of Europe as well as around the world at-large.

In popular terms he would be called a philosopher, a kind of German counterpart to the late Michael Foucault of France. He continues to be one of the leading contributors in a realm of ideas where topics of law, politics and society converge.

In such a role, of course, there are differing opinions about the conclusions Dr. Habermas sets forth. Yet, all agree he is one of the most acute observers of our world as its makes a transition from the international to the global and from the modern to the postmodern.

Of particular relevance for Americans is his idea about the role of what he calls the public sphere and how the important influence of that sphere came to virtually disappear over time. More than that, he asserts that the absence of its influence amounts to a fundamental crisis in our era of democratic values.

Habermas introduces his notion of the public sphere as something that first arose within the coffee houses and fraternal lodges, the clubs and salons of eighteenth century Europe. In that type of hospitable atmosphere, which combined conviviality with privacy, important conversations concerning affairs of government took place.

Moreover, those discussions involved a true cross-section of life in both town and country.  There were farmers and merchants, lawyers, and doctors. There were stable pillars of the community and idealistic dreamers, the callow and the wise, the established and the aspiring.

In the custom of the time, however, questions of religion and politics were left outside the door. Those topics were viewed as being colored by personal bias, as giving rise to heated emotion, as being potentially fatal to friendship, and in any case by their very nature, irresolvable.

Instead, what was discussed were topics of more fundamental and more timeless importance: Should there be a government? If so, what type should it be? What role can the public play, and who will be excluded? Who should decide such questions?

This type of exchange often led to even deeper queries, for example, regarding the makeup of human nature, its capacity for reason—and susceptibility to passion. Should there be an overriding principle for human society, some larger purpose? Can religion play this role, or are its effects too divisive?  These topics were explored, not in partisan debate nor with academic detachment, but with a common desire to enlarge and to understand.

The tenor of such conversations and the atmosphere in which they occurred should not seem foreign or strange to Americans. After all, it was this very type of circumstance and deliberation that gave rise to their own government during that period. It was in such an atmosphere that the men we now call Founding Fathers were able to lay the foundation for a new nation.

Habermas says, however, that after the eighteenth century this public sphere, as he calls it, began to decline. By the end of the nineteenth century any such opportunity for community leaders and community members to engage in such discussions openly, safely and out of public scrutiny had almost disappeared.

The reasons for this decline were various and although the pattern in Europe was somewhat different from that in America, there were close parallels, as well. Most important was the rise of an intrusive and rapacious press. It posed a threat because of its need for controversy and sensation to satisfy commercial necessity.

A second problem seen by Habermas was the institutionalization of learning, especially in the modern university beginning in the nineteenth century. More and more the large human questions became obscured as they were parceled and divided into technical questions accessible only to professional scholars. Specialized language and theoretical constructions made those topics seem hopelessly opaque to persons outside that protected enclave.

Finally, in America, the isolation of the study of law formed another obstacle to civic discourse. The fundamental framework of the American system was a legal one, yet that topic had become inaccessible to outside scrutiny. Although the law school had come to be located on the university campus, it was exempt from the usual interplay between disciplines and free from normal standards of academic accountability.

In pointing out this declining influence of the public sphere Habermas was not proposing a return to the past, a return to the coffee house and fraternal order, the reading club and salon.  Nor was he advocating a bridle on the press and its capacity to probe and expose important issues. As an academic trained in both social theory and law, he did not oppose the mission of the university.

Nonetheless, he observed what he considered to be a serious challenge to the viability of modern democratic institutions. For him, the concern was whether answers to the underlying problems facing government today can be found in the glare and excitement of the popular media or in the divisive exchange of oppositional politics. He thought it may be necessary to step outside that loud and contentious arena to have a different kind of conversation, a reassessment.

For Americans there are fundamental questions about the condition of their government, questions that run deeper than the usual matter of candidates and elections. Those questions concern whether the structure of government has been rendered ineffectual. There are apprehensions about the very nature of the political process itself: Has the notion of the public good become an empty platitude? Has the thought of selfless public service become an unrealistic ideal?

There may be some comfort in the fact that Habermas found these problems to be not just  American or European, but endemic to the institutions that now exist in most democratic countries. Also, many have disagreed with his rather pessimistic appraisal of political conditions around the world.

But at least credit him and the Europeans. Over time they created a public venue and have encouraged wide participation in discussing such important topics. One result is that much of the world looks to Europe for new developments, new solutions to the fundamental problems of governance in a global and postmodern age.

In fact, similar questions are being addressed in America on a very high level in academic and legal forums. But the narrow range of participants and views may actually be symptomatic of the problem. Perhaps it is time to advance a new atmosphere in this country where many points of view can be offered by the wider public—not merely about candidates and issues, but to revisit those questions raised by the Founders. Perhaps it is time to re-establish the public sphere.

NAFTA and the Future of Canada, Mexico and the United States

Editor’s Note:
Mr. Marc Lanthemann
, a graduate of Princeton University and a geopolitical analyst at Stratfor,is writing in George Friedman’s stead this week. Mr. Friedman is
the CEO and chief intelligence officer of Stratfor.

This article is published here by permission of Stratfor.

The 20th anniversary of NAFTA’s implementation on Jan. 1 has revived some of the perennial arguments that have surrounded the bloc since its inception. The general consensus has been that the trade deal was a mixed bag, a generally positive yet disappointing economic experiment.

That consensus may not be wrong. The history of the North American Free Trade Agreement as an institution has been one of piecemeal, often reluctant, integration of three countries with a long tradition of protectionism and fierce defense of economic national sovereignty. While NAFTA was a boon for certain sectors of the economy, particularly the U.S. agriculture industry, the net effect of the world’s second-largest trade bloc remains somewhat unknown.

Continue reading