Why the United States Needs to Restructure the Corporate Income Tax

November 15, 2011

To increase employment and expand their economies, most developed countries are both reducing their corporate tax rates and restructuring their corporate tax systems.  The United States appears to be taking the opposite approach.  Consequently, the increasingly costly U.S. corporate tax structure is driving competitive, profit-seeking corporations to minimize their tax exposure and defer income overseas to lower-tax countries.  If the federal government wants to reverse this trend and remove barriers to American companies competing internationally, it will need to consider an overhaul to the corporate tax structure, reducing its rates and simplifying its stipulations, say researchers Jason Fichtner and Nick Tuszynski.

  • While the average national statutory rate for Organization for Economic Cooperation and Development (OECD) countries is 23.4 percent and the average effective rate is 20.5 percent, the United States has a national statutory rate of 35 percent and an effective rate of 29.0 percent.
  • In 2004, multinational corporations shifted roughly $50 billion away from the United States to low-tax countries.
  • U.S. corporations' share of worldwide profits attributable to foreign revenue has increased from 6.7 percent in 1965 to 38.2 percent in 2009.
  • During the 2000s, major multinational corporations reduced U.S. jobs by 2.9 million while increasing overseas employment by 2.4 million.

The first change that is necessary is an outright reduction in rates.  As American businesses increasingly find themselves competing with foreign firms (notably those of the OECD), the structural disadvantage that they must overcome due to an enormous tax burden will inhibit their ability to compete.  This phenomenon has already begun to occur, with American companies contracting their domestic operations and expanding abroad to take advantage of low-tax economies.  Furthermore, an outright reduction in rates and simpler standards would address the current incentive among firms to turn accounting departments into tax-manipulating, revenue-maximizing think tanks, allowing them to focus their efforts instead on productivity and investment.

Additionally, the government should consider a territorial as opposed to a worldwide tax structure.  This would facilitate the repatriation of corporate earnings and reduce the incentive among firms to protect their profits by keeping them abroad.

Source: Jason Fichtner and Nick Tuszynski, "Why the United States Needs to Restructure the Corporate Income Tax," Mercatus Center, November 2011.

For text:

http://mercatus.org/sites/default/files/publication/Corporate_tax_FichtnerTuszynski_WP1142.pdf

 

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