April Fools’ Day marked the one-year anniversary of the United States having the highest corporate-tax rate in the industrialized world. Unfortunately, the economic damage this policy causes is no joke.
It is not always easy to understand or care about the impact of this policy, which leaves us in the wrong kind of first place. Yet, more and more research suggests it is a problem that should concern all Americans, not just its initial corporate targets.
A study by economists at Ernst & Young shows that our high tax rate is exacerbating the nation’s economic woes by causing a lower quality of living, reduced economic output and a decline in wages. Meanwhile, other countries are lowering their tax rates and attracting business and capital. As other nations move forward on corporate-tax reform by dropping their rates from an average of 45.4 percent to 29.6 percent, the United States stands still and thus falls behind.
President Obama recognizes this: Last year, his Treasury Department released a report that recommended reducing the corporate-tax rate from 35 percent to 28 percent, and an even lower rate for domestic manufacturing companies. On the other side of the proverbial aisle, Rep. Dave Camp, Michigan Republican and chairman of the House Ways and Means Committee, repeatedly has advocated reforming both the corporate and individual tax codes to reduce rates and stimulate economic growth. The American people certainly seem to be ready for a change. A Zogby poll shows 75 percent of the public supports simplification of the corporate-tax code and 62 percent agree that lowering corporate-tax rates will help encourage more hiring.
Despite this trifecta of sentiment, Washington has a way of making most everything difficult. Thus, the push for reform has been slowed by political opportunism, as some in Congress attempt to hijack the process and use this as an opportunity to increase federal tax revenue.
Believe it or not, this crowd might be able to have their cake and eat it, too. Eliminating all corporate-tax deductions and credits would produce enough revenue to lower the rate to 28 percent without adding to the deficit. Counter-intuitively for the tax-and-spend group: Those seeking to increase revenue should, in fact, advocate for even lower rates. According to research by the Tax Foundation, reducing the rate further to 25 percent would increase gross domestic product by 2.2 percent and raise federal tax revenue by 0.8 percent.
While the consensus on corporate-tax reform grows, some remain recalcitrant, claiming the top rate of 35 percent is irrelevant because of the numerous “loopholes” and credits that corporations use to reduce their tax burdens.This argument is somewhat overstated. The Tax Foundation study reviewed 13 analyses of effective tax rates that take those “loopholes” into account and found that the U.S. rate exceeds the international average by 7.6 percentage points. Still, it is undeniable that politicians have long used the tax code to incentivize business to engage in economic activities preferred by Washington. As a result, the system has turned into an abomination that allows corporations with roughly similar profit margins to pay wildly different tax bills, based on whether their particular line of business is in or out of political favor. In the end, concerns over effective tax rates serve not as a deterrent to corporate-tax reform, but yet another glaring reason why the tax code desperately needs an overhaul. We should create a simpler and more transparent corporate-tax law that treats all businesses fairly and allows them to compete globally.
Or we can continue to look like fools at this time every year as jobs and investments continue to migrate overseas.
Brandon Arnold is vice president of National Taxpayers Union.