At 39 percent, the United States has the highest statutory corporate tax rate of the 34 Organisation for Economic Cooperation and Development countries. Many who defend the high rate point out that only evaluating the statutory rates provides, at best, a partial picture of countries’ business tax environments.
In their new release, the “2014 International Tax Competitiveness Index,” Kyle Pomerleau and Andrew Lundeen of the Tax Foundation provide a holistic view of the 34 OECD countries’ business tax systems. They evaluate over 40 tax policy variables to measure tax burdens and structures. Their conclusion: in terms of its corporate tax rate, the United States has little to celebrate.
The United States ranks 32nd in the index, ahead of only Portugal and France. Dragging down the U.S. ranking are its highest-in-the-OECD corporate tax rate, taxation of income earned overseas, imposition of estate taxes, high property taxes, and progressive individual rates.
We spoke with Pomerleau and asked him which of the factors should be the highest priority for reform. He told us that while any improvements to bring U.S. policies in line with international averages would be welcome, lowering the corporate tax rate and moving to a territorial tax system are the two highest priorities. Pomerleau said this is because both are the furthest away from international standards, and that they have major effects on American business investment and growth.
The United States has entirely missed the global trend of corporate tax cuts that started 25 years ago. The average OECD corporate tax rate was 44 percent in 1988, and has been cut by over 40 percent to 25 percent today. Over the same time period, the U.S. rate increased from 38.6 percent to 39.1 percent. In other words, we have moved backwards in terms of corporate tax rates from the tax rates of the late 1980s.
One reason for this is that the Congressional Budget Office uses mostly static scoring of bills under consideration. Under this approach, the revenue-raising aspects of tax reform that would come from increased economic growth are given little weight. This means Congress must come up with other places to offset the projected revenue losses—a difficult task in America’s deeply partisan congressional system.
In addition, the parliamentary system of many OECD countries makes it easier for the political party in power to institute reforms. A congressional system makes it harder to pass harmful legislation. In the case of corporate tax rates, where both parties acknowledge the need for reform, but disagree on where to offset the projected (and overstated) budgetary costs of reform, the system unfortunately stands in the way of lower tax rates and economic growth.
The United States is also stuck in the past when it comes to how it taxes foreign income. Only 6 of the 34 OECD countries tax corporate income on a worldwide basis, one of which is the United States. The rest have moved to a more competitive territorial tax system. This is a major factor behind the string of so-called tax “inversions” that have been in the news lately. In inversions, corporations move their headquarters overseas so they can escape the high taxes they would incur if they invested foreign earnings (that have already been taxed by the country in which they were earned) back in America.
Washington could learn from policymakers in Estonia, New Zealand, and Switzerland, the three countries with the best ratings. All have territorial tax systems and relatively low tax rates across most categories.
As the economy continues to become more globalized, competition between countries to attract businesses and capital will increase. The United States has many advantages, but if other countries keep cutting rates, those advantages may become less relevant.
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