Tuesday, August 19, 2008

The Greek menace

Original Link: http://krugman.blogs.nytimes.com/2008/08/19/the-greek-menace/

By Paul Krugman

Run for the hills! Excessive taxes on corporations are threatening American prosperity, because we can’t match the low, low taxes of other advanced countries. Or so says the Tax Foundation, which is rolling out a new campaign called Compete USA. John McCain has already made big cuts in corporate taxes a large part of his agenda.

There’s a lot to say about this stuff, but right now I’d just like to mention one aspect. The Tax Foundation people start off with a graph that’s supposed to be terrifying, with the headline “Europe cuts rates while U.S. stands still”; the graph shows European tax rates dropping far below the US rate.
What they don’t make clear is that:

1. The graph shows the “statutory” tax rate, which is the maximum rate a corporation can pay in principle. But because corporate tax rules allow all kinds of deductions and exclusions, the statutory rate is a poor guide to the actual disincentives the corporate tax creates.

2. Even more important, while they don’t explain how they calculate the “average” tax rate, the fact that their own data show that all the big economies have tax rates above 30%, while their graph shows an average rate of about 27%, seems to indicate that they’re showing us an unweighted average — that is, one that makes small economies like Ireland and Greece seem as important as big economies like Japan and Germany. And whaddya know, corporate taxes in big economies tend to be higher than those in small economies, and similar to those in the United States, a point made by the Congressional Budget Office in the study from which the chart above is drawn. (Yes, Germany cut rates this year. Big deal.)

So basically, the Tax Foundation wants us to be frightened of the little guys. How can American business survive in a world in which Greek corporations have a big tax advantage?

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