We are sceptical of the claim made last week by Donald Trump’s nominee for Treasury Secretary, Steven Mnuchin, that lowering taxes, particularly corporate taxes, will be enough to boost average annual GDP growth to 3% or even higher. Admittedly, at 35%, the top Federal corporate tax rate is one of the highest in the world. In reality, however, US firms pay a much lower effective tax rate when deductions and allowances are factored in. The effective tax rate for non-financial corporate business has fallen gradually, from as high as 45% in 1960 to around 25% in 2015. That gradual decline in the effective corporate tax rate appears to be linked to a rise in the proportion of pre-tax profits paid out as dividends, but there is no obvious link with capital expenditures, which have actually fallen as a share of profits over the past decade.
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