Higher corporate taxes contribute to inflation

Lower corporate taxes improve international competitiveness

In a 2022 article published in European Economic Review (August 2022, Volume 147, 104157) the authors studied the issue “Do corporate tax cuts boost economic growth?” and found the data ambiguous - in some cases higher growth followed tax cuts and in others the tax cuts are associated with lower growth. The evidence from their study pointed to a conclusion that economic growth was unaffected by corporate tax rates within reasonable bounds. It should be obvious that a 100% corporate tax rate would have a dramatic and negative impact on economic growth but a zero corporate tax rate might have little impact on economic growth, since competition in a level playing field will see little change in corporate practices other than the lower tax cost manifesting itself in lower prices for the goods and service the corporations produce as they contest one another to retain market share.

The literature on the effect of corporate tax rates on economic growth is all over the map with many authors arguing that lower taxes increases economic activity, but the empirical data suggests that may not be the case, even if lower taxes are associated with higher growth in some instances. There are just too many other factors that affect growth that efforts to isolate tax policy are frustrated.

The study’s conclusion is not all that surprising. Taxes, like all other costs, are no more and no less than a cost of doing business and, absent competition from a different tax jurisdiction, put all businesses on a common footing. Taxes do effect cross border competition, resulting in “tax jurisdiction shopping” as businesses decide where to locate operations. Tax policy is an important element of international competition policy even if lower taxes are unlikely to impel growth.

But inflation is another matter. It is certain that higher corporate taxes will largely be passed on to customers in higher prices, and that the burden of those higher prices will fall primarily on the segments of society that comprise the most spending - the lower and middle classes. Income inequality may be skewed but consumption of goods and services (other than certain luxury goods) is correlated with population rather than with wealth. Higher corporate taxes punish poor people, but since they have minimal impact on economic growth (within reasonable bounds) higher corporate taxes will generate greater revenue for tax collectors, albeit no all that much more.

Higher corporate taxes are a tax increase on those least capable of paying the tax, thus corporate taxes are a regressive tax by any measure. In my opinion, the ideal corporate tax is zero, since it will put the industries in the host nation in their most competitive cross-border tax position and tend towards lower prices across the economy. Ireland is a good example - by setting low corporate tax rates Ireland has attracted substantial investment and now hosts 25% of U.S. manufacturing investment in Europe while comprising only 1% of Europe’s population.

The result of Ireland’s shift to a lower corporate tax rate policy in 1996 has seen Ireland’s per capital GDP soar well past that of neighboring United Kingdom.

The rapid growth of Ireland per capita GDP is accompanied by relatively low inflation and what inflation has occurred is related to U.K. energy policies which have driven up all energy costs in the region.

Canada and the United States could learn a bit from Ireland’s positive experience and the U.K.’s negative one. Low corporate taxes have the benefit of greater international competitiveness and lower inflation.

Voters should ignore the bombastic claims of “corporate greed” from far left leaders like Jagmeet Singh and vote for candidates who understand that taxation of corporations is of little value to society and is a burden the poorest in society will bear disproportionately.