The Economy

Peter Crabb: The case for lower Idaho and U.S. corporate tax rates

PETER R. CRABB, professor of finance and economics at Northwest Nazarene University in NampaDecember 10, 2013 

Peter Crabb

There are many new movies coming out this holiday season, but the feature film for the economy is being written in Washington, D.C. Get ready for another "Cliffhanger."

A couple of months ago, policymakers averted a default on the federal debt but put off until early 2014 a decision on the fiscal situation. It's another fiscal cliff. Without major legislative action in both January and February, across the board spending cuts will go into effect.

This is could be a positive for the economy, as a lower budget deficit reduces the government borrowing that crowds out lending to private businesses. But some policymakers would rather raise taxes to close the deficit. There may be a way to do both.

As Democrats and Republicans meet in December and try to reach a compromise, they should look first to two economically important policy areas where compromise is attainable and government revenue may actually rise: corporate taxes and international trade. Reform of both federal and state policies in these areas will benefit income and economic growth, raising tax revenue.

Economic theory predicts higher investment and hiring by corporations when corporate taxes are lower. University of California, Berkeley economist Hal Varian argues that corporate tax rates should be lowered to at least the individual rates, and that corporate income should be taxed where it is made rather than based on a company's home country.

The political support for such tax reform comes from both sides of the aisle. Many Democrats accept the need for a lower corporate tax rate to support jobs. Republicans will likely trade a reduction in the corporate tax rate in exchange for the elimination of loopholes in the tax code.

Together, these two reforms should lead to more investment at home by U.S. corporations and some repatriation of earnings from abroad. Both events should lead to higher tax receipts from corporations.

Loosening trade barriers will also raise incomes and tax revenues. Economists have long supported greater international trade because everyone benefits, importers and exporters alike. Surveys show that more than 87 percent of economists agree that the U.S. should eliminate tariffs and other barriers to trade.

Many Democrats are on record as supporting new free-trade agreements with Asian and African countries. The recently enacted trade agreements with Columbia and South Korea are already showing benefits. Republicans are now supporting new Trans-Pacific and Trans-Atlantic negotiations.

International trade is primarily a federal issue, so Idaho policymakers must focus on corporate taxes. At 7.6 percent, Idaho's corporate income tax ranks among the highest in the nation. When it comes to business investment, how is Idaho expected to compete with the corporate tax-free states of neighboring Nevada and Washington? Further, state taxation of corporate income leads to an inefficient game of government give-and-take for exemptions.

The Idaho Business Advantage tax credit gets 3.75 percent knocked off this rate along with other property and sales tax rebates if the corporation can make large new investments and hire at least 10 new employees. But what about existing business that simply want to re-invest profits or hire a few workers? Why not help everyone?

A complicated tax code and slowing global trade present an unclear picture for business investment in the new year. Without more confidence on the part of business owners, the unemployment is likely to stay high or even rise in 2014.

Businesses will gain confidence with corporate tax reform and more international trade. Sequels are often not as good as the original. Let's not repeat the fiscal cliffhanger.

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prcrabb@nnu.edu

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