Lower Corporate Tax Rate Would Reduce Profit Shifting
Reducing the corporate tax rate to 25 to 30 percent would discourage profit shifting by multinationals, according to a new report from the Tax Foundation.
Up to 35 percent of U.S. corporate tax revenue is lost due to profit shifting, according to some studies. The Organization for Economic Cooperation and Development has recently released an action plan to combat tax base erosion and profit shifting by multinational companies across the globe.
The report argues that lowering the corporate income tax rate would reduce the amount of revenue collected by the federal government but would also reduce income shifting, thereby mitigating revenue losses by increasing the tax base.
Under an aggressive income-shifting model, a 30 percent corporate income tax rate would increase U.S. corporate income by $143 billion and increase overall tax revenue by $8 billion, according to the report. A 25 percent corporate tax rate would increase U.S. corporate income by $278 billion while maintaining the same tax revenue as the current 35 percent rate.
Under a more conservative estimate of income shifting, a 30 percent corporate income tax rate would increase corporate income by $35 billion, but the overall tax revenue would decrease by $24 billion.
“Most scholars agree that the extent to which businesses shift income out of the U.S. is largely driven by the difference between the U.S.’s corporate income tax rate and that of other countries,” said Tax Foundation economist Gavin Ekins in a statement. “Currently, the U.S. has the highest corporate income tax rate and the third least competitive overall tax code in the industrialized world. If lawmakers want to see less shifting, then the most obvious solution is to increase the code’s competitiveness by lowering the rate and broadening the base.”
The income-shifting effect, combined with the internal growth spurred by a tax reduction, makes it more likely that a decrease in the corporate income tax rate could increase tax revenues in the long run. Under some assumptions, the income shifting alone could result in higher tax revenue.