An Idea for Virginia Republicans: Abolish the Commonwealth's Corporate Income Tax

By Peter Roff, Thomas Jefferson Street blog

Until last year, the Commonwealth of Virginia had not voted for a Democrat for president since 1964, the year LBJ trounced Barry Goldwater. Obama's victory along with his party's back-to-back wins for governor and the election of not one but two Democrats to the U.S. Senate have some conservatives thinking its time for some new ideas.

Enter Bob Marcellus, the president of the Richmond Group Fund Co. Ltd., who is assembling a coalition of business leaders and academics in support of a single, simple idea: the complete elimination of Virginia's corporate income tax.

According to Marcellus, the idea is not as radical as it might sound. "During the past 20 years, dozens of countries have concluded that the corporate income tax is one of the most economically destructive mechanisms for raising revenue because it destroys production."

Statistics indicate that U.S. business tax rates are now about 50 percent higher than in non-U.S. OECD countries. The combined federal and state corporate tax rate in the United States is at just below 40 percent versus an average rate of about 26 percent for the rest, which may help explain why so many U.S.-based companies are looking for ways to move part or all of their operations overseas.

"While other countries have been cutting corporate income taxes year after year, our corporate taxes have remained the same, destroying our competitive position," Marcellus says.

Of late, the prevailing mood on Capitol Hill has been to look for ways to punish companies who seek to move all or part of their operations off shore in search of tax relief. Marcellus says the better idea would be "to stop punishing them for staying here" by restructuring the tax code to make it economically advantageous for them to continue to operate in the United States.

Eliminating Virginia's tax on corporations would have a stimulating effect on its economy, as opposed to the Obama stimulus, which focused on vast amounts of new federal spending and putting people to work on public sector projects. That, along with the repeated calls for income redistribution, higher taxes and punitive taxes levied against those in the economy who are the most successful are probably a good part of the reason the Obama program is not working as advertised, as the increase in the U.S. rate of unemployment to its current 9.7 percent attests.

According to supporters of the idea, the corporate tax hits hardest on the most productive, innovative and successful companies when what government should be doing is promote the retention of corporate earnings for reinvestment and expansion that in turn would create new jobs and keep businesses in the commonwealth. According to a study of 50,000 companies conducted by the European Union, a 1 percent increase in marginal corporate income tax rates produces a .92 percent decrease in real wages for workers.

To provide support for his idea Marcellus points to places like Ireland, where in 1988 a national 12.5 percent flat rate tax was put in place. Over the next 14 years Ireland's national wealth more than doubled, growing four times faster than the European average. In one small Swiss province, the influx of new business was so strong after the overall corporate rate was reduced to 6 percent that tax revenues actually increased by 6.6 percent.

It is not clear that either candidate in Virginia's race for governor, Republican Bob McDonnell or Democrat Creigh Deeds, will embrace the idea. If one of them does, however, and they win, look for this idea to be replicated in gubernatorial contests through the country in 2010 and in the 2012 presidential contest- especially if it appears to work as advertised.

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