Research from Germany shows that lower corporate taxes lead to increased wages and employment

A couple of weeks ago I wrote about how President Biden’s proposed corporate tax hike will be bad for Minnesota businesses. The proposal, to raise the corporate tax rate from 21 percent to 28 percent, would, on top of our state’s high rate of state corporate income tax, give Minnesota a combined top corporate tax rate higher than in any country in the industrialized world.

New research from Germany provides more evidence on the negative impacts of this policy. The study, by economists Florian Dorn, Clemens Fuest, Florian Neumeier, and Michael Stimmelmayr:

…considers the consequences of reducing the corporate tax rate from 30 to 25 percent and shortening the period of tax depreciation for investments from ten to four years.

The authors acknowledge that “a combination of the two reforms would reduce tax revenue by EUR 30 billion in the short term,” but find that:

…after a period of adjustment, economic output and private household consumption would be around 3 percent higher than without the reforms. Employment would increase by 1.4 percent and wages by around 4 percent.

Interestingly, the authors also assess the impacts of hiking other taxes:

If, on the other hand, tax increases were the goal of policymakers, a higher VAT rate would be less of a burden on employment and growth than an increase in income tax. If the income tax rate were increased by 3 percentage points on incomes above EUR 100,000, the state would generate EUR 4.9 billion in additional tax revenue in the first year. In the long term, however, the additional tax revenue would fall to EUR 3.4 billion, while economic output would fall by 0.4 percent. Increasing VAT by 1 percentage point, meanwhile, would raise tax revenues by EUR 7.4–7.8 billion while reducing gross domestic product by only 0.2 percent.

Corporate taxes are a favorite ‘bash the rich’ policy. The truth is that corporations do not actually pay the corporate income tax. This new paper from Germany shows, again, that we all bear the burden.