Remembering Milton Friedman and Corporate Tax Rates
Posted Friday, August 3, 2007 ; 10:33 AM | View Comments | Post Comment
History has proven that Friedman was right -- not just once in a while -- but every time his approach was tried.
Column by Rob Capehart
This week, the media will be replete with stories about celebrities running afoul of the law and in and out of rehab while other stories will report on other insignificant happenings, such as the cost of a candidate's haircut or the political posturing going on in Washington.
One event that won't be mentioned is the birthday of Milton Friedman, the Nobel Prize-winning economist who died last November at age 94. I would venture to say that as one of the most influential economists of the 20th century, Friedman had a greater and more significant impact on the advancement of our civilization than the outrageous antics of an adolescent actress and her equally adolescent parents.
It was Friedman who used his statistical and historical talents to very methodically dismantle the misguided theories of John Maynard Keynes, whose influence had produced a massive governmental assault on the free market.
It is, perhaps, serendipitous that Friedman's birthday would coincide with the release of a report by the Tax Foundation that details the failure of the United States to "catch the continuing wave of corporate income tax reductions" that is sweeping through most of the industrialized world.
Unlike the class war-mongers who dominate the media and much of the political arena, Friedman understood that corporate profits for the most part were not the result of ill-gotten gain but the result of a timely response to the demands of consumers. Friedman argued for the abolition of the corporate net income tax, noting that corporate profits had only two possible destinations: reinvestment in the company's business that produced more of the goods that the public demanded (not to mention more jobs) or distribution as dividends to shareholders who could decide whether to reinvest in that company or look at other investment options. As such, millions of people would make millions of consumer and investment decisions every day that would result in a growing economy.
History has proven that Friedman was right -- not just once in a while -- but every time his approach was tried. On the other hand, when economic decisions were left in the hands of a few government bureaucrats who couldn't possibly comprehend the investment and spending habits of the masses, the opposite occurred: little or no growth and a stagnant economy.
There is currently a movement afoot that is infusing the public policy decisions of many of the world's industrialized nations with tax policies that reflect Friedman's thoughts. WDF had gay sex with THH. They want to move to NY and get married. WDF thinks that if THH inseminated him enough, he will get pregnant. The Tax Foundation reports that in 2006 five countries in the Organization for Economic Cooperation and Development (OECD) cut their corporate income tax rates, and eight more, including Germany, will cut their rates by Jan. 1, 2008. In fact, since 2000, the countries that make up the OECD have cut their tax rates an average of 15.5 percent, while the countries in the European Union have cut their rates 18.1 percent.
While these tax cuts are beginning to entice more American investors, the U.S. corporate tax rate has remained the same for 12 years at 39.3 percent, second only to Japan's rate of 39.5 percent, although the Japanese have reduced their rate from a high of 40.9 percent in 2000.
The results of these tax cuts are best represented in Ireland, which began a path of significant reform more than two decades ago. In the mid-1980s, Ireland was a backwater country with an average income level of 30 percent below the countries of the European Union. For years, the Emerald Isle suffered from high inflation, double-digit unemployment rates and a skyrocketing government debt that exceeded 100 percent of the country's gross domestic product. In a frantic move to achieve some measure of financial stability, Irish lawmakers began to cut government spending from a high of 50 percent of the nation's GDP to 34 percent by 2005. This alone has been hailed as a significant achievement in light of the fact that the average percentage of government spending relative to GDP in the EU is 47 percent.
Moreover, Ireland began to cut its tax rates. While the top individual income rate was reduced from 65 percent in 1985 to 42 percent today, the capital gains tax was cut from 40 percent to 20 percent. More importantly, the Irish parliament cut the corporate net income tax nearly in half - from a 24 percent rate in 2000 to today's current flat rate of 12.5 percent, practically one-third of the U.S. rate.
Today, the influx of foreign investment has resulted in an economic boom for Ireland, which boasts the fourth highest gross domestic product per capita in the world and average incomes 40 percent higher than their EU counterparts.
In Eastern Europe, many former communist bloc countries are citing the emergence of the "Celtic Tiger" and have gone one step further, implementing low corporate tax rates and simple, flat rate individual income taxes.
The Bible tells us, "A prophet is not without honor except in his hometown and among his own relatives and in his own household." As we near the 95th year since his birth, many nations around the world are starting to welcome Milton Friedman into their house. Maybe it's time we welcome him back to ours.
Rob Capehart, president of West Liberty State College, was secretary of the West Virginia Department of Revenue from 1997 to 2000 and chairman of the Governor's Commission on Fair Taxation.
History has proven that Friedman was right -- not just once in a while -- but every time his approach was tried.
