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9% Corporate Flat Tax Would Raise Wages, Boost GDP

NEW YORK (MainStreet) — Talk of a flat tax is back, but this time as a replacement to the current corporate income tax structure. Replacing the 35% corporate income tax with a flat tax rate of 9% is a strategy floated by the nonprofit Tax Analysis Center that promises to produce "rapid and dramatic increases in the level of U.S. investment," increase worker wages, boost GDP and maintain existing tax revenue.

"Most people think the corporate tax hits the rich, whereas most economists think it hits workers," says coauthor Laurence Kotlikoff, director of the Tax Analysis Center and professor of economics at Boston University. "The study confirms this. It shows that American workers are big winners under a 9% corporate flat tax. Lower corporate tax rates mean dramatically more corporate investment in the U.S. and that means significantly higher wages."

According to the center's model, a 9% corporate flat tax would:

  • Immediately and permanently raise GDP by roughly 6%
  • Increase capital stock by 17% in the short run and by 30% by 2040
  • Increase wages about 6% in the short term, eventually increasing by 9%

Kotlikoff says the lower corporate tax rate could be achieved by eliminating loopholes in the current system, including accelerated depreciation, bonus depreciation and deferring foreign-earned income.

The study cites the effects of the so-called "Irish Miracle" of the late 1980s. In 1987, Ireland began cutting its 50% corporate tax rate, ultimately reaching a rate of just 12.5% in 2003. As a result, the country experienced a massive inflow of investment, luring over 1,000 multinationals including Motorola, Dell, Wyeth, Intel, Microsoft, IBM, Citigroup, and Bristol-Myers Squibb.

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