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No Joke: One Year Later U.S. Still Has Highest Corporate Tax Rate


Nan Swift
April 3, 2013

What do you get the government that already has everything? The traditional gift for one-year anniversaries is paper, but a picture posted in early March by Sen. McConnell’s (R-KY) office indicates that they already have plenty of that.  Though, truth be told, the fact that just one year ago Monday the U.S. became the proud owner of the highest corporate tax rate in the developed world is more cause for dismay than celebration.

Clocking in at a hefty 35 percent, with ongoing moribund economic growth and persistently high unemployment you might be excused for thinking that maintaining high taxes on job creators was some kind of terrible April fool’s joke. Unfortunately, the economic and political toll is all too real.

The United States’ high corporate income tax rate is making a serious dent in our competitiveness resulting in higher costs for consumers, a loss of jobs, and lower growth. On Monday, the RATE coalition, a group of concerned businesses working toward reducing the corporate income tax, summed up the problem in a letter:

“Today, at 35%, the top federal statutory corporate tax rate is 10 percentage points above the OECD average and nearly 15 points higher when state and local taxes are included,” says the letter, referring to the 34-nation Organization for Economic Cooperation and Development, and signed by 21 CEOs. “The costs to our economy are significant and already being realized. According to a new Ernst & Young study, GDP in 2013 is expected to be between 1.2 and 2.0% lower as a result of our OECD-leading corporate tax rate. Simply put, the U.S. can no longer afford to stand still.”

A great article here at the Tax Foundation explains that in the past the U.S. lowered rates in response to the tax policies of other similar countries to help sustain competitiveness, making the U.S. an attractive place to do business.  A 2012 Ernst and Young report found that:

For the last decade, high corporate tax rates have been driving an increasing amount of U.S. businesses overseas, to incorporate themselves in foreign tax havens. Between 2000 and 2011, the U.S. experienced a net loss of 46 Fortune Global 500 company headquarters, according to a report by Ernst and Young.

The Wall Street Journal confirms the findings, writing that “tax bills remain a primary concern” for companies:

Since 2009, at least 10 U.S. public companies have moved their incorporation address abroad or announced plans to do so, including six in the last year or so, according to a Wall Street Journal analysis of company filings and statements. That's up from just a handful from 2004 through 2008.

The growing loss of domestic jobs, especially at a time when they are needed most, should be alarming to leaders in Washington. Instead, our cash-strapped federal government has become too dependent on the revenue stream from corporate income taxes to see the bigger picture.  As the Tax Foundation writes the hidden costs can easily outweigh the “benefit” of those funds:

In general, a lower rate decreases the distortion and deadweight loss created by the corporate income tax rate. Distortion arises when businesses opt to remain as sole-proprietors, partnerships, or S-corps in order to avoid the corporate tax instead of expanding and structuring themselves as a corporation. Deadweight loss results from the increase in the price and the reduction in the quantity of goods or services produced by corporations below the welfare maximizing market equilibrium. The cost of the taxes can be passed on to consumers through higher prices and fewer goods and services, to the employees through lower wages or fewer jobs, or to capital holders through lower rent or returns on property, stocks, bonds, dividends etc. Thus, society, as a whole, loses.

The flip side of the corporate tax coin is the political fallout from this bad policy. Opponents of lower corporate tax rates are quick to point out that few large corporations end up paying the highest taxes. Armed to the teeth with lobbyists, corporations and industries with the means to do so are quick to jump at a wide variety of loopholes to help limit their tax liability. The Washington Post recently reported:

About 440 corporations and business groups spent tens of millions of dollars lobbying Congress and executive branch agencies on tax reform in the third quarter of last year, a Washington Post analysis shows. And that number continued to rise in the final three months of the year, up nearly 10 percent, the analysis shows.

The budget passed by the Senate just over a week ago tried to raise revenues by eliminating some tax loopholes. But instead of doing so across the board, the budget tried to wield the tax code as a punitive measure to raise taxes on some less favorable industries. For instance, the budget aimed to eliminate the Section 199 deduction - widely available to all manufactures – only for certain oil and gas companies to raise the cost of traditional fuel sources. The constant carve outs for special interests and tax code giveaways creates a toxic environment of crony capitalism in Washington that leaves smaller businesses without the right political connections or the resources to fund aggressive lobbying campaigns holding the bag for big tax bills.

Across the board lower corporate income taxes would both eliminate the need for “loopholes” and other tax credits or deductions at the same time it would spur economic growth.  Funds currently paid to tax attorneys, accountants, and lobbyists could be better allocated toward capital investments and productive aspects of business.

This kind of corporate tax reform would be an enormous boon to corporations and taxpayers alike, especially when accomplished in conjunction with the kind of broad tax reform overhaul being proffered by the House Ways and Means Committee. Corporate taxes are only one part of the bigger problems brought on by a dysfunctional Tax Code. The sooner we finally scrap the code, the better, because our current uncompetitive corporate taxes are killing the proverbial golden goose.


 

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