The economic news lately has not been good.  The staggering credit market and faltering home sales have been a contagion infecting other areas of the American economy.  While economic growth hit a blistering 4.9% in the 3rd quarter of 2007, the unemployment rate reached a two-year high of 5.0% in December.  Profit growth has been slowing, oil has hit record highs of over $100 per barrel, and the value of the dollar has been falling relative to commodities and foreign currencies such as the yen and euro.  The stock market has responded to the dreary news with a downward turn.

I've long advocated a complete overhaul of our tax system, replacing our stifling, anti-growth, complex system with a fair, simple, pro-growth flat tax.  I still take that position, but I recognize the political reality that particularly in an election year, no large-scale tax reform has a chance of passage.  Short of a complete tax overhaul, there is an easy step that our government could take that would help reclaim the value of the dollar, boost the stock market, bolster economic growth, and result in job creation on a massive scale:  make a significant cut in the corporate income tax, currently at an unreasonable high of 35%, one of the highest among industrialized countries.  I propose cutting it roughly in half, to a rate of 20%.

Our current rate ranks us 2nd among industrialized nations in highest corporate tax rate, trailing only Japan and tied with France.  Even the Nordic welfare states Finland and Sweden have lower rates than the United States (both are at 28%); Slovakia, which has implemented a flat tax on individuals and businesses, has a rate of 19%.  Ireland, whose economy is booming, cut their rate to 12.5% and has watched exports and job creation soar while inflation has declined.  Note that in countries like Ireland and Slovakia that have cut corporate tax rates, corporate tax revenue has actually increased.  That's the supply-side nature of cutting marginal tax rates, as businesses boost output, relocate, and face less incentive to manipulate balance sheets, put off investment, or outright cheat tax collection agencies.

According to US government figures, the corporate income tax brought in $354 billion dollars in 2006.  A cut of 35% to 20%, would reduce that collection by about $150 billion in static terms, i.e., absent any supply-side growth effects.  This number is important, as it basically represents the minimum amount of money that instead of being soaked up by a wasteful, inefficient government, would be in the economy creating jobs, investing in infrastructure, raising salaries, or returning to stockholders in the form of dividends and capital gains.  But unlike an infusion of government spending via some sort of government program, this money would have forward-looking impacts.  There would suddenly be a much bigger incentive for businesses to locate or relocate in the United States.  For some, it would provide the needed incentive to start a business.  And unlike a sudden surplus of government cash, this would increase the value of the dollar and stifle inflation.  The stock market would rise, probably dramatically, further incentivizing investment in America.  Government revenues would rise, decreasing the budget deficit and the addition to the national debt.  American business would be more competitive.  In short, we'd see an economy back on the rise, a dramatic comeback.

In objective terms used to measure the economy, the past several years have been a boom, and looking back over the past 25 years, the American economy has been humming along like a well-oiled machine with only 2 hiccups.  We're coming up on a potential third hiccup; taking some free market capitalist medicine would stave off any downturn and prolong the American boom.  We should cut the corporate tax rate now.