Corporate tax cuts needed to rejuvenate economy
When the time comes to pay the tax man, corporate executives realize the United States is the single worst country in the civilized world to do business. That’s a rather stunning development for a country that was founded on the principles of free enterprise.
We’re the only country that hasn’t realized that corporate taxation is a clumsy way to collect revenue. Such levies diminish investment, reduce wages and discourage hiring. Instead of being on the top of the list, where we belong, America is at the very bottom, outperformed by all of the nations — including Japan — that have slashed their corporate-tax rate.
The overall U.S. statutory corporate tax rate is 39.1 percent, more than 2 percentage points higher than Japan’s and 14 points higher than the Organization for Economic Development and Cooperation (OECD) average. Our effective rate, at 27.6 percent, is 12 points higher than the OECDaverage. According a World Bank study of 185 countries, companies operating in the United States had the highest cash tax payments.
This is a policy that makes absolutely no sense, because Uncle Sam actually collects less in revenue than the other OECD countries as a percentage of gross domestic product (GDP), despite the high rates. American Enterprise Institute (AEI) economists Kevin A. Hassett and Aparna Mathur found receipts as a share of GDP have remained constant since 1990, even though the economy grew. Until the 1980s, OECD countries largely stuck with the high corporate-tax-rate model. While countries such as Japan and the United States chose to keep their rates high, the rest proceeded to boost their competitiveness by slashing taxes. One estimate calculates the U.S. government lost $17.4 billion in revenue in 2004 as corporations realized it made sense to shift their investment to friendlier nations overseas.
Because the U.S. marketplace is so large, companies aren’t going to abandon it. This disguises the destructive effect of the high tax rates, because it’s harder to see just how much business we’ve been losing as funds are put to work offshore instead of being invested to create jobs onshore. Because of the punitive tax rates, companies devote their resources to hiring creative accountants who can come up with clever schemes to minimize tax liability rather than directing their energies toward creating products and services for consumers.
All of this creates a measurable drag on economic growth. According to a National Bureau of Economic Research working paper, economic growth falls by 1 percent for a 5 percent increase in the effective marginal tax rate. This is so because high taxes decrease investment, which inevitably leads to lower growth and fewer jobs.
As much as the demagogues on the left paint high corporate taxes as only affecting “the rich,” the opposite is the case. A Congressional Budget Office working paper estimated that employees bear as much as 70 percent of the burden of corporate taxes. The AEI economists calculated that wages fall 1 percent for every 1 percentage point increase in the corporate tax rate.
Having the highest corporate tax rate in the world is a disaster for American competitiveness. It sends a message to companies that they’d be better off relocating elsewhere. America will continue on its current growthless economic path unless politicians wake up and realize what the rest of the civilized world figured out a long time ago: It’s time to cut corporate-tax rates.
The Washington Times
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