How should the US pay for corporate tax reform?(Read article summary)
Corporate tax reform in the US seems to be inevitable, Harris writes, but questions remain over how to pay for it. Finland may have the answer.
Finlandâ€™s government recentlyÂ announcedÂ a broad fiscal reform package that cuts corporate tax ratesâ€”financed in part by higher taxes on corporate dividends. The plan makes sense for Finland and is worth considering here at home.
Finland will lower the corporate rate to 20 percent in 2014, down from theÂ current rateÂ of 24.5 percent (and 26.0 percent in 2011). The move follows rate cuts in competing European nations, including the UK and Sweden, and a planned rate cut in Denmark. Finlandâ€™s current corporate rate is at about the median in the OECD; dropping the rate to 20 percent will put Finlandâ€™s rate close to the bottom for European OECD countries.
Finland plans to pay for part of the rate cut by boosting the effective investor tax rate on dividends paid by companies listed on the Finnish stock exchange. (The reform is not a statutory rate hike, but rather aÂ reduction in preferencesÂ for dividends.) Effective taxes will increase only on dividends, not on capital gains.
The swap makes sense. Â A lower corporate tax rate should help attract new business to Finland, which maintains an extremely open and competitive economy. As in other countries, a lower corporate rate will reduce distortionsâ€”such as the type and financing of business investmentâ€”that become more severe with higher rates. Moreover, the swap is likely progressive, and will help mitigate Finlandâ€™s rise in income inequality over the past decade.Â
The plan is not without drawbacks. One chief concern is that taxing only dividends of companies listed on the Finnish exchange will push firms off the bourse. Still, the reformâ€™s benefits appear to outweigh the costs.
A similar reform would make sense in the United States. There is widespread agreement that the U.S. corporate tax rate is too high. BothÂ President ObamaÂ and House Budget CommitteeÂ Chairman Paul Ryanâ€”a pair rarely in agreementâ€”have called for a lower corporate rate. Despite a jump in tax rates in 2013 relative to last yearâ€”the top rate on dividends rose from 15 percent to 23.8 percentâ€”tax rates on investment returns remain at historic lows for most taxpayers.
Moreover, trading a lower corporate tax for higher taxes on investors in the U.S. would be progressive. My TPC colleagues and IÂ analyzedÂ a revenue-neutral plan to tax capital gains and dividends as ordinary income while simultaneously lowering the corporate tax rate from 35 percent to about 26 percent; we found the plan would lower the average tax burden for the bottom 99 percent of taxpayers. (Implementing Finlandâ€™s plan today would pay for a smaller drop in the corporate tax rate because of the higher rates in 2013 and the fact that the reform would only raise taxes on dividends, not capital gains.)
Corporate tax reform in the U.S. seems to be inevitable, but questions remain over how to pay for it. Finland may have the answer.