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Falling Behind on Corporate Income Tax is No Laughing Matter

by Pete Sepp / /

There’s an old saying that goes, “Fool me once, shame on you, fool me twice, shame on me.” But when it comes to our tax system, the shame is a one-way street leading to our nation’s capital. Today is the second anniversary of the U.S.’s dubious distinction of having the highest combined corporate tax rate (39.1 percent) in the industrialized world. And guess who bears the burden of this cruel joke? Workers, investors, and taxpayers… everyone.

On April 1, 2012, Japan finally implemented a reform plan that lowered its corporate tax rates and simplified its tax base. “Finally” is an apt choice of words, since most developed countries had been taking such steps for years.  Since 1985, for example, the simple average corporate tax rate for OECD nations has fallen from a high of close to 50 percent down to roughly 25 percent.

When was the last time the U.S. took bold steps to slash its corporate tax rate? Hint: You needed a Walkman to listen to music, a paper map to find directions, and a landline to make phone calls. The year was 1986. Today, nearly three decades later, advances in technology allow us to listen to music, navigate, and communicate all on one device. Our tax code, on the other hand, has made no such advances.

If this seems ironic for the model of capitalism, that’s because it is. There is no good reason for the U.S. to voluntarily place itself at such a competitive disadvantage. Our 39.1 percent corporate tax rate is a disincentive to domestic investment and job creation.  And while some high-taxers dismiss this benchmark because it fails to account for the “effective” burden after deductions and credits, this too is a misnomer. Even by that measurement, the U.S. is still a serious laggard.

Even as we fall behind, other countries are making moves to attract American businesses with more desirable tax rates – not just Japan, but other competitors such as Canada and the United Kingdom. Still, the burden of paying taxes is not the only problem afflicting our businesses – it’s the burden of complying with taxes. As NTU’s most recent “Taxing Trend” analysis of systemic complexity reported from a PwC analysis, the U.S. ranked an underwhelming 63rd out of 185 countries surveyed for the time to fill out all the necessary business tax forms associated with a medium-sized manufacturer (“1” being the easiest to deal with).

Fortunately, some Members of Congress are starting to get serious about overhauling our nation’s personal and business tax systems. The House Ways and Means Committee’s recent tax reform discussion draft may need work in several areas, but it has helped to advance a much-needed dialogue.

The House Majority’s 10-Year Budget Resolution, introduced today, goes even further. While it does not endorse a specific plan, it calls for a wide-ranging debate over comprehensive tax reform that could include not only the Chairman’s draft but other worthy proposals to replace the code with a flat tax or consumption tax.

A day like this is a good one to remind Washington it’s time to stop fooling around with tax reform and get to work. Our lawmakers need to take action now before another three decades – and many more of our competitors – pass us by.

(Picture source: Mercatus Center, Veronique de Rugy, http://mercatus.org/publication/corporate-income-tax-rates-oecd)