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Only United Arab Emirates Beats America’s Corporate Tax Rate

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Only United Arab Emirates Beats America’s Corporate Tax Rate

March 14, 2017

The only country in the world with a higher statutory rate than the United States is the United Arab Emirates. America’s statutory corporate tax rate is the highest out of the major countries that comprise the G20. This needs to change.

Unlike most other developed countries, the United States has not reduced federal corporate tax rates over the past two decades. This places America at a competitive disadvantage, and the high rate discourages investment. These flaws in corporate tax policy are part of the reason the number of U.S.-owned foreign corporations—companies where the majority of shares are owned by a single U.S. taxpayer but are incorporated abroad—has surged in recent years.

Across the political spectrum there is increasing recognition that the current system is deeply flawed, and growing support for reform. Corporate tax reform is one of the areas of focus for President Trump. His plan would reduce the statutory rate to 15 percent. Obama also put forward a plan in his 2015 budget that would have brought rates down, but he included other provisions that would have increased taxes, rendering the plan unacceptable to Republicans.

A new report from the Congressional Budget Office underscores just how far behind America has fallen. Lowering corporate tax rates would encourage investment and help America become more competitive.

Since 1993, the United States has left its federal corporate income tax rate unchanged at 35 percent. Even then it was one of the higher rates, but in the intervening years other countries have taken steps to lower their rates in a bid to become more competitive.

Canada, for example, brought its top statutory rate down from 35.9 percent in 2003 to 26.1 percent in 2012. Out of the G20 countries the only others to leave their rates unchanged from 2003 to 2012 were Argentina, Australia, and Brazil, but their rates were lower than U.S. rates. As a result of this inaction, the U.S. current rate is a full 10 percentage points higher than the average for the rest of the G20 countries, according to the CBO report.

The United Arab Emirates is the only country with a higher statutory rate. The gap between the United States and other countries has only grown since the end of the period in CBO’s report. Since 2012, Japan, South Africa, and the United Kingdom have made further reductions to their top statutory corporate tax rates. In the international context, America is being outpaced by other major industrialized countries enacting smart reforms to their corporate tax systems.

Source: Congressional Budget Office. Created with Datawrapper.

The statutory corporate rate is a major factor that influences investment decisions, but it is not the only one. Other provisions in the tax code that determine how much tax companies pay are also important. These include the treatment of depreciation, deductions that differ based on the source of financing, and other tax preferences that make up the effective corporate tax rate.

 As the CBO report explains, the effective marginal corporate tax rate measures “a corporation’s tax burden on returns from a marginal investment (one that is expected to earn just enough, after taxes, to attract investors)...  [it] is more informative for decisions about whether to expand ongoing projects in those countries in which a company already operates.”

The United States does not perform quite as badly here, but is still essentially tied with the U.K. for the third highest rate. Just as with the statutory rates, the U.S. has seen no improvement in this measure over the decade analyzed, while most other G20 countries have reduced this tax burden.

Source: Congressional Budget Office. Created with Datawrapper.

 

The CBO report shows that the number of U.S.-owned foreign corporations in other G20 countries grew by almost 17 percent from 2004 to 2012. In all but five G20 countries the number increased over the period, and in China and India it more than doubled. This increase has happened as the number of U.S.-based companies in the Nasdaq and New York Stock Exchange has fallen in half over the past 20 years.

Source: Congressional Budget Office.

High corporate tax rates in the United States discourages investment, and the CBO report shows how much of an outlier America has become. Corporate taxes are ripe for reform, and there has been bipartisan appetite to address these issues in recent years. Reducing corporate tax rates would bolster economic growth and encourage companies to expand operations here. Other countries have learned their lessons about the cost of high corporate tax rates and taken steps to address these problems. America should too, without further delay.

 

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes. 

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