The Stubbornest Tax

April 26, 2012

The United States is radically out of step with contemporary corporate tax practice.  The link between an attractive business climate, facilitated by lower corporate tax rates, and jobs and wages has been widely acknowledged across the political spectrum.  Nevertheless, the U.S. rates and taxing system remain grossly outdated and persistently high, says Kevin Hassett, a senior fellow at the American Enterprise Institute.

This is a particularly troubling phenomenon because numerous studies have shown that workers bear the lion's share of the weight of high corporate taxes.  This is because businesses often relocate operations to major trade partners of the United States in response to the taxes, robbing Americans of wages and jobs.

  • After Japan lowered its combined corporate tax rate on April 1 of this year, the United States was left with the highest rate among the developed nations in the Organization for Economic Cooperation and Development (OECD).
  • The United States now has the third-highest recorded combined rate in the world, at 39.2 percent, with only the Democratic Republic of Congo and Guyana rating higher.
  • The average combined rate in the OECD is now 25.4 percent, leaving the United States a whopping 13.8 percentage points higher than its typical trading partner.
  • Furthermore, the United States is one of the few countries in the world to tax money that its corporations earn abroad once that money is repatriated; other nations tax only the activity that occurs within their borders.

The largest American businesses respond rationally to this tax structure by locating numerous operations overseas, and then maintaining that accumulated wealth abroad to avoid repatriation taxes.  This denies Americans a chance to compete for valuable jobs

How did we get here?

  • In 1993, President Bill Clinton signed into law the Deficit Reduction Act of 1993, which increased the federal corporate-tax rate from 34 to 35 percent and the combined rate from 38.9 to 39.7.
  • The change came just after an explosion of academic literature that identified clear links between lower corporate tax rates and economic growth.
  • Since then, there have been 132 corporate tax rate reductions by OECD members, while Presidents Clinton, Bush and Obama have remained inactive.

Source: Kevin Hassett, "The Stubbornest Tax," American Enterprise Institute, April 24, 2012.

For text:

http://www.aei.org/article/economics/fiscal-policy/taxes/the-stubbornest-tax/

 

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