Changes in Tax Codes Versus Changes in the Value of the Dollar: The Arithmetic of Competitiveness

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Friday, 10 December 2010 05:29

The NYT tells us that cutting corporate taxes is:

"a way to address warnings by American business that corporate tax rates and the costs of complying with the tax code are cutting into their global competitiveness."

Corporate profits are equal to about 16 percent of the value of output in the corporate sector. Businesses pay roughly a third of their profits in taxes, which means that taxes are equal to about 5 percent of the value of output. If taxes were reduced by 20 percent, a very large tax cut, then this would reduce the cost of doing business in the United States by 1 percent relative to foreign countries.

Suppose the dollar falls by 10 percent against other currencies. This would reduce the price of goods produced in the United States by 10 percent relative to goods produced elsewhere in the world, or ten times as much as the boost to competitiveness that businesses would receive from even a very large reduction in tax rates.

It is understandable that businesses would claim that cutting their taxes is important for U.S. competitiveness. People often make false claims in order to enrich themselves. However, newspapers are not supposed to simply accept such claims as being true and present them to their readers this way.