U.S. Corporate Tax Reform Could Revitalize the Economy

May 31, 2013

The U.S. tax system has become more complicated and convoluted over the last 50 years, and the U.S. federal government is now paying the price. The U.S. tax code is over 60,000 pages long, and has thousands of deductions and exemptions ripe for the taking by high earning companies. To maintain satisfactory revenue for the government, Congress must reform the tax code, says Diana Furchtgott-Roth, a senior fellow with the Manhattan Institute.

Our tax system has three fundamental weaknesses: (1) marginal tax rates are too high; (2) the structure of both personal and corporate taxes is much too complicated; and (3) the incentives for political mischief at the IRS are high while the likelihood of detection is low. It turns out all three of these weaknesses are related, and they have one easy solution: tax simplification.

  • America's tax system has become so complex that a 2012 Taxpayer Advocate Service Report found that 6.1 billion hours per year are spent by individuals and businesses preparing taxes, not including time spent on audits or responding to IRS notices.
  • A simpler tax system would solve many problems.
  • It would likely reduce and simplify the benefits of tax-exempt status for all groups.
  • A simpler tax would also reduce incentives of companies such as Apple to avoid the American tax jurisdiction.
  • But most importantly, tax simplification would stimulate economic growth.

America's corporate rate (35 percent) is now the highest in the industrialized world, far above the average of 24 percent for countries in the Organization for Economic Cooperation and Development, which is made up of America's major competitors. Plus, America taxes income on a worldwide rather than territorial basis.

  • Canada and Germany have 15 percent corporate tax rates. Both countries only tax corporate income generated within their borders, rather than corporations' worldwide income, as does America.
  • Republicans and Democrats both know that our corporate tax rates are too high, and that bringing U.S. corporate tax rates in line with worldwide rates will probably bring in revenue and discourage other investments from leaving.

The question now remains: Can Congress come to a consensus on tax reform to benefit themselves and the American economy?

Source: Diana Furchtgott-Roth, "Apple, IRS Highlight the Need for Tax Reform," MarketWatch, May 24, 2013.

 

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