When Japan cut its corporate tax rate to 38.01 percent from 39.5 percent in April, the United States corporate tax rate of 39.2 percent became the highest in the developed world. Politicians last reformed the system over a quarter-century ago, but since then the global economy has changed significantly. The result is an outdated tax code in desperate need of change. There are many negative consequences of such a high corporate tax rate.
A burdening tax rate makes it difficult for domestic companies to compete in the global market. Of the 34 nations belonging to the Organization for Economic Cooperation and Development (OECD), 30 have lowered their corporate tax rates since 2000. Germany has dropped its top rate by 22 points, while Canada has cut its top rate by 13 points. As our economic competitors continue to lower their respective rates, U.S. policymakers seem content with maintaining the highest corporate tax rate in the developed world. Reducing the U.S. tax rate will enable domestic companies to compete on a less crooked playing field.
The current tax rate encourages domestic companies to shift investments and profits from the U.S. to lower-tax jurisdictions. A 2008 report by the Government Accountability Office found that 83 of the 100 largest publicly traded companies in the U.S. had subsidiaries in countries listed as tax havens. The disparity that exists between the U.S. corporate tax rate and those of other countries causes the U.S. to become a less attractive location for new investment, because after-tax profits promise to be greater in foreign tax havens than in the U.S.
For example, in 2011 Exxon Mobil earned $73.3 billion before taxes. The company paid $1.5 billion in taxes to the U.S. government, equating to a 4 percent tax rate. The $20.6 billion in remaining taxes was paid to foreign governments where Exxon Mobil operates, which is indicative of the prevalent outsourcing our country is facing. The Wall Street Journal reported in April 2011 that at least 2.4 million U.S. jobs were lost due to outsourcing over the past decade. The U.S. will become a more attractive location for new investment, and the jobs that come with it.
Additionally, this year the nation’s economy grew in the third quarter at a rate of 2 percent. This brings the economic growth in 2012 to an anemic 1.7 percent. This rate is slower than last year (1.8 percent), which was even slower than the year before (2.4 percent). Coincidentally, a report published by the OECD in November 2010 concluded that corporate taxes “are most harmful type of tax for economic growth.” In 2008, China lowered its corporate tax rate to 25 percent from 33 percent. The following year, foreign investment in China increased by 30 percent, and the economy grew by 10 percent. The historical record is absolutely clear: lower corporate tax rates increase economic growth.
The primary argument against a reduction in the corporate tax rate is that we cannot afford the loss of revenue it would cause. If the U.S. were raising extravagant amounts of tax revenue, then perhaps these concerns would be justified. But this is simply not the case. From 2000 to 2009, the U.S. earned a federal corporate tax revenue (percent of GDP) of 2.06, which was less than the OECD average over the same period, 3 percent. A study conducted in February 2011 by the American Enterprise Institute found that cutting the rate to 26.4 percent could generate up to $748 billion in additional tax revenue over the next ten years.
Politicians on both sides of the aisle have proposed cutting the corporate tax rate. President Barack Obama, for example, has recommended a rate of 25 percent for manufacturers and 28 percent for all other corporations, while former Governor Mitt Romney has called for a 25 percent rate on all corporations. No matter the outcome of the presidential election, one thing is for certain: the corporate tax code must be reformed.