The Need for Tax Reform, Part 2: Competing in a Global Economy

Apr 10, 2012

Yesterday in the first part of my series on comprehensive tax reform, I covered lowering individual tax rates. Today, I'll cover the need for lowering America's corporate tax rate.

April 1 wasn’t a joke. The United States still has the world’s highest corporate tax rate, and no one is laughing.

According to the Organisation for Economic Co-operation and Development (OECD), the average global corporate rate for developed countries is 25%, while the United States’ rate is 39.2%.

This puts America at a disadvantage. Laura Tyson, former chairwoman of the Council of Economic Advisers under President Clinton, wrote last year about the changing global tax landscape [emphasis mine]:

After the 1986 tax overhaul, the United States had one of the lowest corporate tax rates among the advanced industrial countries. Since then, these countries have been slashing their rates both to attract investment by American and other foreign companies and to discourage their own companies from shifting operations and profits to foreign locations offering even lower tax rates.

The resulting “race to the bottom” in corporate tax rates has made the United States a less attractive place for both domestic and foreign investments, and that has encouraged American multinational companies to shift more of their income abroad, in ways permitted by the United States tax code.

The Tax Foundation chart (see above) shows the trend over the last few decades of America’s competitors lowering their rates while the U.S. stands still. Even this year, Japan, Canada, and the United Kingdom have reduced their rates. The U.S. falls further behind.

When Washington finally gets serious about corporate tax reform, they should know that it can’t be done in a vacuum. Reform must take into account pass-through entities like sole proprietorships, limited liability companies, partnerships, and S corporations that file under the individual tax code. To go back to the National Journal story I referred to yesterday, “tackling the corporate side of the tax code without taking individual rates into account is like putting sunscreen on half of your face and letting the other side burn.”

It’s a cliché but it’s accurate, we compete in a global economy. Other countries have been cutting their corporate tax rates to spur growth. America needs to lower its corporate tax rate to make sure American companies remain competitive globally, attract investment, grow the economy, and create jobs.

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