Corporate Tax Reform: Should We Really Believe the Research?

Posted: 27 Oct 2008

See all articles by Jane Gravelle

Jane Gravelle

Government of the United States of America - Congressional Research Service

Thomas L. Hungerford


Date Written: October 27, 2008


Arguments for lowering the corporate tax rate include the traditional concerns about economic distortions arising from the corporate tax and newer concerns arising from the increasingly global nature of the economy. Some claims have been made that lowering the corporate tax rate would raise revenue because of the behavioral responses, an effect that is linked to an open economy. Although the corporate tax has generally been viewed as contributing to a more progressive tax system because the burden falls on capital income and thus on higher-income individuals, claims have also been made that the burden falls not on owners of capital, but on labor income - an effect also linked to an open economy. The analysis in this report suggests that many of the newer concerns expressed about the corporate tax are not supported by empirical data. Claims that behavioral responses could cause revenue to rise if rates were cut do not hold up on either a theoretical basis or an empirical basis. Cross-country studies to provide direct evidence showing that the burden of the corporate tax actually falls on labor yield unreasonable results and prove to suffer from econometric problems.

The traditional concerns about the corporate tax, however, appear valid. While an argument may be made that the tax is still needed as a backstop to individual tax collections, it does result in some economic distortions. These economic distortions, however, have declined substantially over time as corporate rates and shares of output have fallen. Moreover, it is difficult to lower the corporate tax without creating a way of sheltering individual income given the low rates of tax on dividends and capital gains. A number of revenue-neutral changes are available that could reduce these distortions, allow for a lower corporate statutory tax rate, and lead to a more efficient corporate tax system. These changes include base broadening, reducing the benefits of debt finance through inflation indexing, and reducing the tax at the firm level offset by an increase at the individual level.

The views expressed in this report do not reflect the views of the Congressional Research Service or the Library of Congress.

Suggested Citation

Gravelle, Jane and Hungerford, Thomas L., Corporate Tax Reform: Should We Really Believe the Research? (October 27, 2008). Tax Notes, Vol. 121, No. 4, 2008. Available at SSRN:

Jane Gravelle (Contact Author)

Government of the United States of America - Congressional Research Service ( email )

101 Independence Avenue, SE
Washington, DC 20540
United States
202-707-7829 (Phone)

Thomas L. Hungerford

Independent ( email )

No Address Available

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