Philadelphia Reflections

Lowering the Taxes on Corporations

In the early years of the 21st Century, Ireland lowered taxes on corporate profits to a 12.5% rate, far lower than neighboring countries. Whatever else it did, it promptly encouraged corporations in Germany, Denmark, the United Kingdom, and other neighbors -- to move headquarters to Ireland where taxes were so low. Ireland is primarily rural, and a housing shortage developed in the cities as workers migrated to take advantage of the new jobs. Home prices went through the roof, mortgage applications overwhelmed local banks, who promptly re-sold mortgages to foreign banks. Sound familiar? It caused a housing bubble and then a horrendous international financial crisis. The European Union is financially and politically strained by the consequences and threatened to break apart over it.

Irish Jig

That sounds pretty bad and should be a lesson to others. What Canada and a number of the individual United States got out of it was mainly this: if you lower corporation taxes, it causes prosperity. And so it might if politicians would do it gradually and moderately. Gradually and moderately are unfamiliar words in politics. Furthermore, there has long been a fundamental unfairness in taxing corporate profits twice -- once when the profits are made, and a second time when dividends are paid to shareholders. But it is obviously dangerous business, particularly when the governments involved are inexperienced. Canadians started talking about lowering their taxes to 16.5%, and no one could say whether that is a safe level or not. Within weeks, twenty-nine states with Republican governors were sending up trial balloons about joining this movement, and Governor Mitch Daniels of Indiana was much in demand as a consultant, and maybe a Presidential candidate, because Indiana had lowered corporate taxation some time ago, with favorable results.

This was exactly the sort of behavior James Madison had in mind when he designed the United States Constitution; it gave the people a way of disciplining overbearing state governments. Raise our taxes, and we will move. So there are strong arguments that these governors are approaching the right thing, and equally strong indications that everybody had better be plenty careful how this is approached.

The basic idea is good; double taxation should stop, and there is nothing in Madison's Constitution to prevent the Governors from doing what they say they would like to do. So how's this for a suggestion: if this movement gets started, let's take the opportunity to reduce all corporate income tax to zero. If everybody has the same zero rate, the incentive to migrate will disappear, and that's a good thing.

But if a major revenue source for the states disappears, what will take its place? At that moment of what would look like a crisis, it would be time for a national reconsideration and revision of the tax codes. And that would be an even more desirable outcome, provided it is done in an orderly and sensible way.

Originally published: Saturday, January 15, 2011; most-recently modified: Sunday, July 21, 2019