Friday, September 3, 2010

Reduce Corporate Taxes, Create Jobs and Growth
"Think of the economy as a pie split among workers, savers and the government, with the government's slice fixed. The savers' slice will equal the after-tax return on each unit of the capital stock, and what's left goes to workers as after-tax wages. The fairness advocates in effect claim that low tax rates on dividends and capital gains increase the share of the pie that goes to high-income savers. But the low tax rates increase the absolute size of the workers' slice by making the entire pie bigger. That's because low tax rates encourage capital accumulation, productivity and wage growth."
"There are at least four channels through which Mr. Bush's tax reform (proposed and passed) raised the long-run productive capacity of the economy-that is, increased the size of the pie. First, since lower taxes mean higher returns to investors, those investors allocate more funds to corporate capital. Corporations can raise capital for investment more cheaply. As a result, the nation's capital stock and output increase.
Second, reducing or eliminating the differential tax treatment between corporate and noncorporate investments means that investment flows are not channeled artificially by tax considerations and the overall productivity of the economy increases.
Third, lowering or eliminating taxes on capital mitigates distortions in our financial structure. Prior to 2003, equity financing was disadvantaged relative to debt financing, with taxes levied twice, at the corporate level and again at the investor level. Because interest payments to debt holders are deductible at the corporate level, debt financing was taxed only once, at the investor level. This system contributed to over-reliance on debt financing. The 2003 tax cuts reduced this bias substantially. Nonfinancial companies went into the recent crisis with lower leverage as a result, a very good thing.
Fourth, low taxes on dividends encourage firms with few growth opportunities to distribute the funds to shareholders. Those shareholders could then reinvest funds in other, more innovative and productive ventures-another very good thing for economic efficiency and growth."

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