High Corporate Tax Rates Making United States Uncompetitive

A recent study by the Paris-based Organization for Economic Co-operation and Development which examined the national tax burdens and their impact on the growth and incomes in member countries concluded that corporate taxes are most harmful for growth. The study also concluded that investment is adversely affected by corporate taxation and that the most profitable and rapidly growing companies tend to be the most sensitive to high business tax rates.

With an average combined federal and state corporate tax rate of 39.3%, the United States has the second highest corporate tax rate in the world, next only to Japan. The corporate tax rate in the United States is even higher than socialist Sweden and welfare-states Germany and France. If the business is based in states like California, Iowa, New Jersey, or Pennsylvania which have high corporate tax rates, then the tax on business income is even higher than in Japan. Economists have long argued that this high rate of corporate taxation has made the United States uncompetitive, driving away capital. But the lawmakers in Washington, D.C., feel otherwise. A Government Accountability Office (GAO) study in 2005 came to the conclusion that almost 28% of the large American companies paid no tax that year.

Although the corporate tax rate is almost 39.3%, the share of corporate taxes in the Gross Domestic Product (GDP) is 2.5%. Ireland has a corporate tax rate of 12.5%, but the share of corporate taxes in its GDP is 3.4% – higher than the United States with its higher corporate tax rate.

The irony of the situation is that while the United States has the highest corporate rates, there are a lot of loopholes which favored businesses can use to avoid the high rates. The Tax Foundation looked at the 2005 GAO study and found that among the large companies that paid no taxes, 85% of them made no profits that year. The same year, two large companies – American Airlines and General Motors – used the loopholes and avoided paying taxes by reporting losses of $862 million and $10.5 billion. The loopholes also affect the economy adversely. Businesses spend millions of dollars to exploit these loopholes.

The United States taxes businesses on their worldwide income. This has important implications for American companies competing in foreign markets. Because of higher tax costs, American companies may lose foreign market share, generate lower returns for American shareholders, and hire fewer skilled workers in the United States.

In an effort to remain competitive, some American companies are changing their structure to become foreign-owned firms – the American company places itself under a new foreign parent company formed in a lower-tax jurisdiction. The firm still pays taxes to the U.S. government on all U.S. income, but it no longer pays U.S. tax on its income earned outside the U.S.

Other countries are cutting corporate tax rates because they’ve learned the importance of having a competitive tax climate. Countries cannot attract new business and job creation if their corporate income taxes are significantly higher than comparable nations. Most other major countries do not tax foreign business income as aggressively as the United States. In fact, most countries have “territorial” tax systems that tax businesses on domestic income only.

It’s time for the lawmakers in Washington to wake up and reform the tax code. In this ultra-competitive world, countries are going all out to woo businesses. The United States is becoming a less competitive place to do business. The inaction on the part of the lawmakers is only making it easier for other countries to woo American companies with lower tax rates.

1 comment to High Corporate Tax Rates Making United States Uncompetitive

  • Bill Goedecke

    You got to be kidding. We have just been suckered by the biggest corporate scam of all time with these financial bailouts, after these financial corporations rigged the game for easy cash until the whole thing become unsustainable. At the same time, in California where I live, our entire state is becoming financially unstable. We don’t have money for schools. And yet this article is here arguing for less taxes for the largest business entities. As far as companies having headquarters elsewhere, obviously they don’t have any loyalty to the country. I consider the corporate elite to be traitorous and parasitic.

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