Globalization and capital mobility are increasing tax competition among countries. Lower tax rates increase after-tax returns to capital, raising economic growth rates. They can also make economies more attractive for foreign investment. Furthermore, lower taxes on capital are generally associated with increased government tax revenues.
Despite this, the United States has the highest corporate tax rate in the developed world at a top rate of 35 percent.
Why Is There a Corporate Tax? Economist Jack Mintz cites three reasons for the corporate income tax:
- The corporate tax pays for public goods, such as infrastructure, and services used by corporations to help their profitability.
- It acts as a backstop to personal income taxes; otherwise, wealthy individuals could use “shell” corporations to reclassify their personal income as corporate earnings.2
- And, it captures profits from fixed factors of production, such as land and buildings.
However, the corporate tax is not the largest revenue producer for governments by any means. On average, it produces about 8.5 percent of revenue for the G-7, the group of seven wealthiest countries, and about 10.5 percent for the United States.
Investment is very sensitive to corporate tax rates. Globalization makes it increasingly easier to move capital
across national borders, and investors generally seek lower tax jurisdictions. Some developing nations have cut corporate tax rates to attract foreign investment from developed countries.