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The U.S. repositioned some naval forces near Libya and threatened Monday that all options remain on the table to protect Libyans threatened by an increasingly isolated and defiant Moammar Gadhafi, including the possible use of warplanes to patrol Libyan skies.

Secretary of State Hillary Rodham Clinton said the United States is exploring the idea of a no-fly zone to prevent Gadhafi’s regime from bombing its citizens, and she welcomed a series of sanctions outlined by European leaders designed to force the dictator to stop attacks on civilians and step down after 42 years of iron-fisted rule.

After a series of meetings with foreign policy chiefs in Switzerland, Clinton said the United States is sending aid teams to help Libyan refugees. She sharpened the U.S. demand that Gadhafi step aside in the face of armed opposition now in control of large portions of the North African oil state.

“Gadhafi has lost the legitimacy to govern and it is time for him to go without further violence or delay,” she said.

“No option is off the table. That of course includes a no-fly zone,” Clinton added.

The European Union issued travel bans and an asset freeze against senior Libyan officials, and an arms embargo on the country. Germany went further, proposing a 60-day economic embargo to prevent Gadhafi’s regime from using oil and other revenues to repress his people.

Meanwhile, the Pentagon said Monday that it was moving naval and air forces in the region in case they are needed, but did not say what they might be used for.

“We have planners working various contingency plans and … as part of that we are repositioning forces in the region to be able to provide options and flexibility,” said Marine Col. Dave Lapan, a Defense Department spokesman.

Describing the Pentagon as in “preparing and planning mode,” Lapan said the U.S. military is not involved in the planned French humanitarian flights and that no decision had been made on whether to set up a no-fly zone. He declined to say whether the U.S. had flown surveillance and intelligence flights over Libya.

The U.S. has a regular military presence in the Mediterranean Sea, two aircraft carriers in the Persian Gulf area and a wide range of surveillance equipment available for use in the region. Without specific information about what assets are being moved and where, it is impossible to tell whether the U.S. was issuing a largely empty threat.

Clinton said the flight ban is under active consideration by the U.S. and its allies, but the idea seemed far-fetched for now. Senior U.S. officials said the issue was not even discussed during Clinton’s meeting with Russian Foreign Minister Sergey Lavrov, whose OK would be important. Lavrov dismissed the idea in remarks following his meeting.

Clinton said the U.S. will send special aid teams to Libya’s borders with Egypt and Tunisia, where increasingly desperate crowds are fleeing a potential civil war. She said the U.S. has pledged $10 million to help refugees.

EU foreign policy chief Catherine Ashton said the European measures, including a freeze on assets, aim to reinforce U.N. Security Council sanctions against Libya approved over the weekend.

The EU action is significant because Europe has much more leverage over Libya than the United States _ 85 percent of Libyan oil goes to Europe,l and Gadhafi and his family are thought to have significant assets in Britain, Switzerland and Italy. Switzerland and Britain already have hit Libya with a freeze on assets.

Even before Ashton announced the new sanctions, France pledged to send two planes with humanitarian aid to Libya’s opposition stronghold of Benghazi while Germany also mulled a two-month cutoff of oil payments to Gadhafi’s regime. This came after days of increasing concern about the hundreds, and potentially thousands, of deaths caused by Gadhafi’s military resistance against the popular uprising in his country.

“The massive violence against peaceful demonstrators shocks our conscience. It should also spring us into action,” Ashton told the Human Rights Council.

The EU also embargoed any equipment that could be “used for internal repression,” Ashton said, urging nations to coordinate actions to help people across North Africa and the Middle East.

She said the possibility of creating a no-fly zone over Libya would involve a more complex set of negotiations.

British Prime Minister David Cameron told British lawmakers Monday he is working with Britain’s allies on a plan to establish a military no-fly zone over Libya, since “we do not in any way rule out the use of military assets” to deal with Gadhafi’s embattled regime.

In Paris, French Prime Minister Francois Fillon said many more discussions were needed before the United Nations would support a no-fly zone over Libya and questioned whether NATO should get involved in a civil war in a North African country. The NATO chief has already rejected intervening in Libya.

Libya’s oil chief says production is down 50 percent due to foreign oil workers fleeing the uprising, but the head of the National Oil Co. told The Associated Press on Monday that Libya’s oil installations are protected and safe, disputing remarks by the EU energy commissioner who said Gadhafi has lost control of major fields.

The EU gets almost 5 percent of its fuel from Libya, which has the largest proven oil reserves in Africa, ahead of even Nigeria and Algeria. In 2009, the EU imported $27.5 billion in fuel from Libya _ accounting for 85 percent of all the $32 billion in fuel that Libya exported that year, according to World Trade Organization figures.

Gadhafi’s government has been in power since 1969, but Clinton told the U.N.’s Human Rights Council that he and his allies have “lost the legitimacy to govern” by reportedly executing soldiers who refused to turn their guns on civilians and other severe human rights abuses. The council itself has recommended suspending Libya as a member.

Fillon said planes were taking off for the eastern city of Benghazi with doctors, nurses, medicines and medical equipment.

“It will be the beginning of a massive operation of humanitarian support for the populations of liberated territories,” he said on RTL radio. “(France is studying) all the options to make Colonel Gadhafi understand that he should go.”

Germany’s foreign minister, Guido Westerwelle, said the EU should consider a total ban on payments to Libya, including for oil deliveries from there. But he said Germany wants a 60-day ban to prevent Gadhafi and his family from receiving any fresh funds.

“This dictator family has to be financially dried up to stop them from hiring ever more mercenaries for a lot of money so they can attack the Libyan people,” Westerwelle told reporters in Geneva. “We must do everything so this murder ends.”

Since the U.N. Security Council voted Saturday to impose new penalties against Libya, Clinton said the United States was “reaching out to many different Libyans who are attempting to organize,” mostly in eastern Libya.

In response Monday, Libya’s state-run news agency, JANA, quoted a foreign ministry official as saying that Clinton’s comments are “a flagrant intervention in Libya’s internal affairs and … of the United Nations charter.”

Australian Foreign Minister Kevin Rudd called on the world’s powers to impose a no-fly zone over Libya and compared Gadhafi’s violent suppression of opposition forces to genocides in Rwanda, the Bosnian town of Srebrenica and Sudan’s Darfur region.

“For the sake of humanity, go now,” Rudd said.

British and German military planes swooped into Libya’s desert over the weekend, rescuing hundreds of oil workers and civilians stranded at remote sites. The secret military missions signaled the readiness of Western nations to disregard Libya’s territorial integrity when it comes to the safety of their citizens.

The U.N. Security Council has told the International Criminal Court to look into possible crimes against humanity occurring in Libya, only the second such referral. The first was in 2005 when the U.N. asked the world’s first permanent war crimes tribunal to probe mass killings in Darfur.

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Free checking is alive and well

Stocks recovered their poise Friday following the previous day’s sharp drop in oil prices on speculation that Saudi Arabia would be willing to make up for any shortfall in crude production from Libya.

The catalyst to Thursday’s decline in oil prices was the expectation that Saudi Arabia, the world’s biggest crude exporter, could pump more oil out to make up for lost supplies from Libya, which is effectively split into two after a popular uprising.

In normal circumstances, Libya produces about 1.6 million barrels of crude per day, but its output has been heavily impacted by the violence that has caused nearly 300 deaths, according to a partial count by Human Rights Watch.

In London, a barrel of Brent crude was up 76 cents at $112.14 a barrel, still $7 below its high point on Thursday. Meanwhile, the equivalent New York rate was up 37 cents at $97.65 a barrel, again around $5 down from the previous day’s peak.

The knock-on effect on stocks has been positive as investors breathe a sigh of relief that the recent sharp rise in oil prices has come to a halt, however briefly _ the fear is that sky-high oil prices will choke the fragile economic recovery around the world.

In Europe, Germany’s DAX was up 0.6 percent at 7,169 while the CAC-40 in Paris rose 1.2 percent to 4,055. Britain’s FTSE 100 index of leading British shares was up only 0.2 percent at 5,934.39 though trading was halted soon after the opening after another technical glitch.

Wall Street was poised for a fairly solid opening, too _ Dow futures were up 61 points at 12,098 while the broader Standard & Poor’s 500 futures rose 7.7 points to 1,310.40.

Libya was likely to continue to dominate sentiment as the trading week comes to a nervous end.

With reports indicating an escalation in the violence in and around the capital city of Tripoli, now that large parts of the country are in the control of opposition groups, there are fears that longtime leader Moammar Gadhafi may be preparing for a final and bloody showdown.

This year the longtime leaders of Tunisia and Egypt have already had to quit following massive popular uprisings.

The biggest worry in the markets is not Libya but whether the crisis spreads through the Persian Gulf’s bigger energy producers. Already Bahrain’s government is facing daily protests and there are fears that Saudi Arabia’s royal family may be next in line to face the wrath of its people. The announcement of a massive $36 billion package of benefits earlier this week was seen as an attempt by King Abdullah to ease popular discontent.

“If the political unrest was to spread to the world’s largest oil producer, markets would have to discuss the possibility of a new oil crisis and its consequences for the global economy,” said Ashley Davies, an analyst at Commerzbank.

If the crisis spreads there, experts say oil prices could reach $200 a barrel, potentially tipping the world economy back into recession.

The fragility of the global recovery was evidenced by the fact that Britain contracted by a greater than anticipated 0.6 percent in the final three months of 2010. Though the heavy snow in December was the main reason behind the contraction, the figures underlined how vulnerable the economy could be to even higher energy prices and interest rates.

The news that the contraction was greater than the initial 0.5 percent estimate hit the pound, sending the currency 0.4 percent lower against the dollar, while the euro rose 0.2 percent to 0.8574 pound.

Elsewhere, the euro was 0.2 percent lower at $1.3783 and the dollar 0.1 percent down at 81.87 yen.

In Asia, Japan’s Nikkei 225 stock average rose 0.7 percent to close at 10,526.76 and South Korea’s Kospi also added 0.7 percent, to 1,963.43. Hong Kong’s Hang Seng index jumped 1.8 percent to 23,012.37.

The benchmark Shanghai Composite Index was virtually unchanged at 2,878.57, and down 0.7 percent for the week, while the Shenzhen Composite Index edged up less than 0.1 percent to 1,280.30 in lackluster trading.

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Pamela Sampson in Bangkok contributed to this report.

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German Chancellor Angela Merkel and French President Nicolas Sarkozy led calls for European Union sanctions against Libyan leader Muammar Qaddafi as political unrest continued in the North African nation.

Merkel said that Qaddafi’s televised speech yesterday in which he threatened his own people with civil war was “alarming.” Sarkozy said today that France may suspend economic and commercial relations with Libya, according to an e- mailed statement in Paris.

The European Union in Brussels is suspending negotiations with the Libyan government on an EU-Libya Framework Agreement and said the 27-nation bloc “is ready to take further measures.” EU foreign policy chief Catherine Ashton said “those responsible for the brutal aggression and violence against civilians will be held to account.”

Qaddafi has vowed to fight a growing rebellion until his “last drop of blood,” as army units defected and a former aide said his regime may crumble within days. Human Rights Watch says 300 people have already died in the violence.

Sarkozy said he is asking “European partners to rapidly adopt concrete sanctions so that those who are implicated in the violence know that they must bear the consequences of their actions,” according to the statement. “These measures should include the possibility of making people face justice, blocking access to the European Union, and the surveillance of financial movements guaranteed high risk personal loans.”

‘All Avenues’

French government spokesman Francois Baroin called Libya’s unrest “chaos” and told reporters that France is “determined” to see Europe act against Libya’s leader through sanctions and the suspension of all trade.

“If the use of violence doesn’t stop, Germany will call for us to use all avenues of pressure and influence on Libya, including the question of talking about sanctions,” Merkel said.

EU President Herman Van Rompuy called “for an immediate end to the use of force” in Libya. “I have seen horrible crimes that are unacceptable and must not remain without Consequences,” he said.

European countries have started evacuating the 10,000 EU citizens in Libya, Olivier Bailly, an EU spokesman, said in Brussels. France yesterday started repatriating about 750 citizens living in Libya with companies including oil-producer Total SA sending their French employees back home.

Two German Luftwaffe transport planes and a chartered Lufthansa AG jet flew out about 350 Germans and Europeans yesterday, the German Foreign Ministry in Berlin said in a statement. The German government believes that about 250 Germans remain in Libya, according to the statement.

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Even by Pentagon standards, it’s an eye-popping prize: a $35 billion contract to build nearly 200 giant airborne refueling tankers. And the decade-long brawl by two defense industry titans to win it has been just as epic.

In a matter of weeks

After bulking up on emerging-market stocks for months, professional investors have cut and run with a speed almost as swift as the power shift in Egypt.

In January, about 43 percent of professional managers were so fond of emerging-market stocks from areas such as Asia, Latin America and the Middle East, they were holding supersize portions in the portfolios they manage.

Now, only 5 percent of global fund managers are favoring emerging markets. That’s the lowest level since the stock market hit bottom in March 2009, according to a Bank of America Merrill Lynch survey of fund managers throughout the world.

The firm’s global equity strategy team called it a “collapse in global investor allocations” and noted that the change is especially dramatic given the sentiment of fund managers. The managers are exceptionally optimistic about stocks in general and eager to invest in global markets. But they are leery of the emerging markets that were popular until recently, countries such as India, South Africa and Brazil.

Egypt, of course, provided a lesson that emerging markets can be volatile and change without warning from seemingly mild-mannered places to hotbeds of strife and uncertainty. But Merrill Lynch global strategist Michael Penn pointed out in a report that fund managers are particularly concerned about the threat of inflation, which is building in some emerging markets while remaining minimal in the U.S.

Emerging-market stocks have declined about 5 percent since early January, after climbing about 122 percent over the past couple of years. For three weeks, investors have been pulling billions out of emerging market funds and adding money to U.S., European and Japan stock funds, a reversal of last year’s tendency to shun the U.S. and steer money to faster-growing areas, according to EPFR Global, which tracks fund flows. The firm said about two-thirds of the money pulled out of emerging markets recently was by institutions or large professional investors such as pension and hedge funds.

UBS economist Jonathan Anderson noted this week that he hadn’t seen such nervousness among clients for a long time. In a report, he said, investors are asking: “Is the emerging economic model falling apart? Should we dump all our (emerging market) exposure? How close are we to a repeat of the 2008 collapse?”

Anderson thinks the questions are “wildly exaggerated,” although he expects nervousness to continue as global food prices and related inflation fears continue, and political tension remain in the Middle East and North Africa.

Some analysts have linked sharply rising food prices over the last year to recent political unrest. They note that in some emerging markets consumers spend substantial portions of their income on food, while Americans spend far less proportionately. As prices of wheat, corn, sugar and edible oils have soared, the World Bank has estimated people in poverty have increased by about 44 million in low- and middle-income countries.

About 75 percent of fund managers surveyed by Merrill Lynch expect inflation to continue climbing globally this year, especially in commodities. Besides the impact on food, rising basic material and energy costs can put pressure on corporate profits and cause stocks to languish or decline.

In addition, as inflation heats up, countries try to slow growth somewhat by raising interest rates, and the fear is they will accidentally go too far and slow the economy too much.

In response, the fund managers are lightening up on stocks in material and manufacturing companies, while adding to companies that produce technology, energy and consumer discretionary products.

Yet Anderson noted that corporate earnings in emerging-market countries continue to outperform developed countries. In general, he said, the recent downturn in emerging-market countries has left stock prices more attractive.

Investors searching for emerging-market stocks may have to be more discriminating than they have been, culling through regions of the world rather than buying all areas. The Leuthold Group, for example, recently cut back its emerging-market exposure and reduced China to its lowest level ever, just 2 percent of the company’s portfolio. Emerging markets, in general, make up 24 percent of the firm’s stock holdings compared with 30 percent late last year.

Meanwhile, the firm is more optimistic about growth picking up steam in developed areas and has raised exposure to the U.S., Japan and Europe to 76 percent, compared with 70 percent at the end of last year.

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Borders is planning liquidation sales in the 200 stores it is shutting down as part of its Chapter 11 bankruptcy filing.

"There will be opportunities for liquidation-type sales," said Borders spokesman Donald Cutler on Thursday. "Specifications about them will be revealed in the coming days and weeks."

Borders, the second-largest book retailer behind Barnes & Noble (BKS, Fortune 500), announced on Wednesday that it had filed for bankruptcy and was closing down nearly one-third of its 659 stores. The closures are expected to be completed in April.

"It’s quite possible that some, if not all of the stores on the list of 200, might have a sale this weekend," said Michael Norris, senior analyst with Simba Information, a provider of research and advice to publishers.

Norris has seen this type of thing before. In Stanford, Conn., a Borders-owned Waldenbooks held a fire sale before closing its doors. So he plans to visit his local Borders in Milford, Conn., this weekend and see if there are sales.

Borders does have other options for dealing with its inventory, including returning books to their publishers. "Depending on the arrangements with the publisher, they might be able to put the books back to the publishers, said Craig Johnson, president of Customer Growth Partners. "Or the publishers might say they don’t want these books."

Johnson said this is the type of arrangement that gets hashed out in bankruptcy court.

The Chapter 11 filing lists 30 publishers as creditors to Borders. Penguin Putnam holds the largest claim, at $41 million, followed by Hachette Book Group, at $37 million, and Simon & Schuster, with $34 million.

"Penguin hopes that Borders will emerge from this process as a smaller but strong book retailer, and will work closely with Borders management to support this transition," said Penguin spokesman David Zimmer.

But the publishers and Borders would not discuss their business relationship with CNNMoney.

Bestsellers and other books that are too valuable to be discounted might be moved to other stores.

"They could go on fire sale, but more realistically they will go to the other 400 stores that will still be running," said Johnson.

Borders might even choose to unload heavily discounted books by moving them from successful stores and dumping them in stores that are going to be shuttered.

"One of the great ways to get rid of obsolete inventory is to move it into one of the stores that’s slated for closure," said Marshal Cohen, chief retail analyst with NPD Group. "The book business is very good at moving inventory."

Book retailers have tried to evolve by incorporating e-books, with mixed success.

But Greg Segall, managing partner with Versa Capital Management, which invests in bankruptcies including retailers, said that the real threat to brick-and-mortar book retailers is the rising prevalence of online retailers such as Amazon.

"I suspect there are people who have preference for and enjoy shopping in the stores, but obviously there are more people who do not, or Borders wouldn’t be going out of business," he said.

Borders said that its gift cards will be unaffected by the bankruptcy process, as they will still be usable in the remaining stores and at Borders.com. 

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Students at the University at Albany might have to say goodbye to the theater program. And in Reno, the University of Nevada’s German studies program will soon be history.

Facing declining tax revenues in the wake of the Great Recession, states are slashing funding for higher education, forcing many colleges to eliminate majors and entire departments.

While administrators say they’re trimming less popular areas that will have a smaller impact, some students are reeling from the changes. The cuts are forcing many to alter plans, change majors or even switch schools, and some worry that the elimination of their degrees will hurt their job searches after graduation.

"I’m hoping that when I apply for jobs, they’ll be able to look past the fact that my university cut my program," said Victoria Sheehan, a French major at the University at Albany, State University of New York, whose program is a potential target.

Last October when the university announced that her program was under consideration for closure, the sophomore put her plans to study abroad on hold, and loaded up with French classes to finish her requirements as quickly as possible.

While the school assured students it would allow current majors to complete their studies, she’s worried that administrators might pull the plug early.

Jens Schubert had done all but his dissertation in resource economics when the University of Nevada, Reno, announced his program would be phased out. He transferred to the University of Tennessee rather than complete his program at UNR.

Because he has to repeat classes, he said the move has delayed his graduation by at least a year. But he thinks it’s better than a diploma from a defunct program, which could be a strike against him in the eyes of potential employers.

"If they find out the department doesn’t exist anymore it might send the wrong impression," he said. "You can’t explain that because you might not get the chance."

Cutting deep

Since 2008, at least 43 states have cut budgets for public higher education, according to a 2010 report by the Center on Budget and Policy Priorities, a left-leaning think tank. State higher education spending nationwide dropped $3.5 billion in fiscal 2010 from the year earlier, according to a report from the Center for the Study of Education Policy at Illinois State University business card design.

The University at Albany, was forced to make cuts after losing $12 million in state funding last year. Administrators looked at factors like enrollment trends, said Edelgard Wulfert, dean of the College of Arts and Sciences.

For example, the French department has had a steady decline in majors over the years and Wulfert expects that will continue. It has seven full-time professors teaching 35 to 40 student majors each year. By contrast, the communications program has the same number of faculty and 550 majors.

Provost Marc Johnson of the University of Nevada, Reno, used a similar philosophy to explain his decision to eliminate 23 programs and sharply reduce six others. Some 350 students, including Schubert, were affected by the reorganization, but the changes helped insulate the rest of the school, he said.

"Are we narrower? Yes," he said. "But by cutting some areas strategically, we are able to maintain the current quality and size of other programs."

More pain ahead

Governors are now introducing their budgets for fiscal 2012, bringing new rounds of cuts for higher education.

In New York, Gov. Andrew Cuomo’s proposed budget would reduce state funding for community colleges and universities by 10%. Gov. Brian Sandoval of Nevada proposed cutting $162 million from higher education.

And Gov. Bobby Jindal of Louisiana asked the state’s Board of Regents to assess the possibility of merging the State University of New Orleans and Southern University at New Orleans, eliminating duplicate departments.

Louisiana’s Board of Regents is already considering 450 degree programs for elimination across the state’s 19 public colleges, universities and professional schools. That’s one-third of all programs offered.

In the past high-demand programs like teaching were excluded from cuts, said Meg Casper, a spokeswoman for the board. "This go-around we have not excluded any programs." 

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China, the biggest buyer of U.S. Treasury securities, reduced its holdings in December for the second straight month.

China’s holdings of Treasury debt dropped 0.4 percent to $892 billion, the Treasury Department said Tuesday. The declines follow four months of increases. China’s ownership of U.S. government debt is slightly below the $895 billion it held a year ago.

Overall, foreign holdings of Treasury securities rose 0.6 percent $4.37 trillion. Britain and Japan ramped up their purchases of U.S. government debt in December. That suggests overseas governments and private investors are still willing to buy U.S. government debt.

The U.S. government is selling huge amounts of debt to finance record-high deficits. This year’s deficit is forecast to reach $1.65 trillion this year, the highest ever quick guaranteed personal loans. Last year the government posted a $1.3 trillion deficit.

Overseas demand for Treasurys helps lower the interest rate the U.S. government pays on its debt. If the United States had to finance its debt through U.S. investors alone, the government would have to pay higher rates. American companies and consumers would also pay higher rates.

Japan, the second-largest buyer of U.S. Treasurys, boosted its holdings 0.7 percent to $883.6 billion.

Britain, the third-largest, strongly increased its holdings 5.8 percent to $541.3 billion. Britain has tripled its holdings of U.S. Treasury securities in the past year.

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The U.S. is about to have the highest corporate tax rate in the developed world because our competitors have noticed that revenue goes up as rates go down. Multinational corporations today nimbly move their profits to the friendliest environment, rewarding tax havens like never before.

It looks as if President Barack Obama and congressional Democrats are going to miss out on the single biggest policy opportunity for the U.S. this year because of their ideological resistance to the idea that lower rates can increase revenue, also known as the Laffer curve.

The devil, as so often happens, was in the details of what Obama said in his State of the Union address: “I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit.”

A careful reading shows that Obama conditioned his support for tax reform on revenue neutrality — that is, no net loss or gain in what the federal government collects in taxes. The usual referee in such matters, Congress’s Joint Committee on Taxation, doesn’t fully incorporate what’s known as dynamic scoring, or anticipating higher growth from lower taxes. So legislation that meets Obama’s prerequisite probably won’t lower corporate taxes significantly.

Message Received

If there were any doubts about the administration’s position, they were put to rest last week by Treasury Secretary Timothy Geithner, who said, “We’re not going to ask Americans to pay higher taxes so we can lower taxes on businesses.”

Obama and Geithner must not understand the fix our country is in.

Corporate taxes “are the most harmful type of tax for economic growth,” according to a November 2010 report by the Organization for Economic Cooperation and Development.

In the World Bank-supported “Doing Business 2011” report, the U.S.’s worst ranking by far was in the category called “paying taxes” — 62nd out of 183 economies, tied with Uganda. That needs to be fixed, whether or not the budget experts on Capitol Hill say the repair costs too much.

The U.S. top corporate tax rate of 35 percent in 2010 was higher than all other OECD nations except Japan, which has embarked on a 5 percentage-point cut. The average rate in the OECD is 23.5 percent. Ireland’s rate is only 10.9 percent; Turkey’s is 13.1 percent.

If the high rate in the U.S. raised lots of revenue, cutting it might be bad news for the federal budget. But that’s not a problem.

Below Average

The U.S. earns less federal corporate tax revenue, as a percentage of gross domestic product, than the average OECD country. Higher rates, lower revenue.

From 2000 through 2009, the U.S. average corporate tax revenue as a percentage of GDP was 2.06 percent, according to OECD data. The average for the rest of the OECD was almost a percentage point higher, at 3 percent.

In 2009, the U.S. ratio dropped to 1.64 percent. That year, the U.K., with a tax rate of 28 percent, raised 2.8 percent of GDP. South Korea raised 3.4 percent of GDP with a rate of 22 percent. Belgium raised 2.5 percent of GDP with a rate of 34 percent.

A number of studies have indicated that a Laffer curve exists for corporate taxes. One study I did with Alex Brill, looking at data for OECD countries from 2000 to 2005, found that the U.S. could maximize its tax revenue by cutting the top corporate rate 8.6 percentage points, to 26.4 percent.

Money Rolls In

If the average OECD country set its rate at 26.4 percent, it would raise 3.8 percent of GDP from corporate tax revenue, according to my analysis of historical correlations. If the U.S. managed to increase its corporate revenue as a share of GDP to 3.8 percent, it would yield a startling $2.8 trillion during the next decade above what the Congressional Budget Office now projects.

Even less-rosy assumptions can’t spoil the fun. Let’s say the U.S. achieves merely the average improvement of an OECD country that reduces its corporate tax rate to 26.4 percent from 35 percent. The improvement would still generate an impressive $748 billion in additional tax revenue over the next 10 years.

All of this might force Obama to reconsider his obeisance to revenue neutrality, since under these models, tax revenue doesn’t remain neutral — it soars. (If he really wants to deprive his supporters of billions to spend, he could lower the corporate tax rate all the way to 17.4 percent. By the rules of the Laffer curve, that rate generates the same revenue as 35 percent.)

Republicans have asserted for years that just about all tax cuts pay for themselves. They’ve almost always been wrong about that. But with regard to corporate taxes, it’s true. Laffer prevails.

Political reflex might lead Democrats to ignore the evidence that lowering the corporate tax rate increases revenue. If so, too bad, because we’ll leave free money on the table.

Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. The opinions expressed are his own.)

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