NCPA - National Center for Policy Analysis


July 13, 2007

Lawmakers recently approved an 8.9 percentage point reduction in the corporate income tax rate.  Too bad the tax cutters are Germans, not Americans, says the Wall Street Journal.

There's a trend here:

  • At least 25 developed nations have adopted Reaganite corporate income tax rate cuts since 2001; The United States is conspicuously not one of them.
  • Vietnam has recently announced it is cutting its corporate rate to 25 percent from 28 percent.
  • Singapore has approved a corporate tax cut to 18 percent from 20 percent to compete with low-tax Hong Kong's rate of 17.5 percent.
  • Even in France, new President Nicolas Sarkozy has proposed reducing the corporate tax rate to 25 percent from 34.4 percent.

As a result, the United States now has the unflattering distinction of having the developed world's highest corporate tax rate of 39.3 percent (35 percent federal plus a state average of 4.3 percent), according to the Tax Foundation.

Foreign leaders are also learning another lesson from cutting taxes -- lower corporate tax rates with fewer loopholes can lead to more, not less, tax revenue from business:

  • Ireland, for example, has a 12.5 percent corporate rate, nearly the lowest in the world, and yet collects 3.6 percent of GDP in corporate revenues, well above the international average.
  • America, by contrast, with its near 40 percent rate has been averaging less than 2.5 percent of GDP in corporate receipts.

Unfortunately, Congress is moving in the reverse direction, threatening to raise the tax rate on corporate dividends, which is another tax on business income.  There's also movement in the Senate to raise taxes on the foreign-source income of U.S. companies. The effect would be to raise the marginal tax rate for companies that base their corporate headquarters abroad.

Source: Editorial, "We're Number One, Alas," Wall Street Journal, July 13, 2007.

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