We need a lower corporate tax rate

By Elaine Kamarck and James P. Pinkerton
April 4, 2012

The United States is used to being a world leader, but this time, it’s bad news for American jobs and growth: As of Apr. 1, we now have the highest corporate tax rate of all the industrialized nations in the world.

Japan has officially reduced its combined corporate tax rate from 39.5 percent to 38.01 percent, leaving the U.S. in the dubious position of being number one in anti-competitiveness with a current combined rate of 39.2 percent. That’s right: Our combined corporate tax rate, and federal rate at 35 percent, leaves us in a weaker position relative to other leading economies. That’s the bad news. The good news is that there is a sensible solution to lowering it and many signs that, in a surprising turn of events, the political will to achieve it exists in both parties.

In February, Treasury Secretary Timothy Geithner announced the outlines of a plan to reduce the U.S. corporate tax rate from 35 percent to 28 percent. Meanwhile, House Republican leaders have united around an even lower rate of 25 percent – the worldwide average tax rate among Organization for Economic Cooperation and Development (OECD) countries.

So now the negotiations begin – even during an election year. A rate more in line with the OECD average coupled with the elimination of special interest tax credits and deductions has broad support among policymakers and in the business community. When President Ronald Reagan and congressional Democrats took this approach in the 1980s, it set off a period of record economic growth that produced millions of new jobs and laid the foundation for a period of prosperity that lasted two decades.

It also proved to be a model for the world, much of which followed suit. Over the last 20 years, America’s competitors have lowered their top corporate rates to levels as low as 12.5 percent and 8.5 percent in the cases of Ireland and Switzerland, while the U.S. has not. This has significantly affected America’s ability to compete in an increasingly interconnected global economy. Reforming the tax code presents an opportunity to level the playing field and have every U.S. corporation pay the same, competitive rate. By doing so, we create a fairer, more streamlined code with a broadened base that makes the United States an attractive place to do business.

The Information Technology and Innovation Foundation described the problem last July, saying: “The United States is at risk of losing its global competitive advantage and with it faster per-capita income growth. To effectively respond, the nation must take concerted and strategic actions in a host of areas, including reform of the corporate tax code to transform it into a more effective tool to support private sector efforts to innovate and be more productive.”

Simply put, the nation is in great danger of losing a key component of its competitive edge now that the U.S. has the highest corporate tax rate among industrialized nations. U.S. companies also understand the urgency for the United States to have a competitive tax rate and have begun working for reform: “Being taxed at higher effective tax rates means we have less money available to make capital improvements, invest in innovation and stay competitive, create new jobs, offer higher compensation and better benefits to our employees and offer lower prices to our customers, and [it] makes us less attractive to investors in the capital market,” said Brad Mays, senior vice-president for tax at Macy’s Inc.

The current economic recovery is the most anemic in the postwar period. And a dramatic solution is needed. The time has come for both parties to implement corporate tax reform, spur investment and create more jobs in this country.

PHOTO: The reflected image of the dome of the Capitol in Washington, February 17, 2012. REUTERS/Kevin Lamarque

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