Corporate taxes: We’re number 1
As of April 1st, when Japan officially lowered its corporate tax rate, we took over the top spot in the world, as James Pethokoukis points out:
With Japan officially cutting its corporate tax rate as of today, America now has the highest rate among advanced economies. Even its effective tax rate is way above average despite the likes of General Electric spending billions to game the labyrinthine code. A smarter approach would be to substitute a business consumption tax.
Now the United States might cling to second place if Japan cancels the rate reduction to help pay for the tsunami and earthquake devastation. After factoring in state taxes, America’s top rate of 40 percent would still exceed the average of 26 percent for the rest of the OECD.
No, it’s not an April fool’s joke. We do become the nation which taxes corporate entities the most in the world. As Pethokoukis also points out, tax rates are like sticker prices on cars – the real tax is significantly lower than that. But in our case, even with the $40 billion in compliance costs, etc. spent by corporations to lower their tax bill, we still remain the highest corporate tax rate in the world:
Headline rates, of course, are like sticker prices on new cars. The real numbers are lower, thanks in part to the $40 billion companies spend annually to comply with, and often sidestep, the maximum levy. GE, for example, has taken heat for consistently paying less than what the U.S. tax code would imply it should.
But even taking into account the efforts of attorneys and lobbyists, the average effective U.S. rate in 2010 was 29 percent against 21 percent for international counterparts, according to the American Enterprise Institute. And before the recession, corporate tax revenue as a share of U.S. GDP was at its highest since the 1970s.
“Competitive” is a word politicians like to throw around. But their tax rate is non-competitive. It is a factor that weighs heavily on where a business may choose to locate. Or relocate. So while we maintain the highest corporate rate in the world, we see politicians mouthing off about punishing corporations that “outsource” jobs. It is a reaction to a problem government has created and now government talks about punishing those who react rationally to their tax rate? Amazing.
Secondly, as we’ve said ad nauseum – corporations don’t pay taxes, their customers do. The corporation, for the most part, simply acts as a means to pass those taxes (incorporated in the price of the good or service produced by the corporation) on to the Federal government. Any tax rate increase in the corporate world is a tax increase on the customers of that corporation.
What effect would lowering corporate taxes have? Pethokoukis lays out the litany:
Politicians of all stripes have been talking about lowering corporate taxes and eliminating loopholes to pay for a sharp rate reduction. A sharply lower rate — Canada’s will be just 15 percent in January 2012 — would boost worker wages, investment, productivity, jobs and growth. Such reforms, though a big improvement, would still leave in place a flawed and unwieldy structure.
Like the rest of our tax structure, the corporate tax system is in bad need of reform. And yes, it’s just another problem among a galaxy of problems that most likely won’t be adequately addressed. That’s not to say some aren’t trying. Pethokoukis points out an alternative that will, apparently, be introduced by Rep. Paul Ryan in the GOP’s budget plan for next year:
A better alternative might be a consumption tax where business would simply determine its liability by subtracting total purchases from total sales. The tax would then be imposed on what’s left, essentially a firm’s value added. Unlike the corporate income tax, a consumption tax would allow the cost of investments to be fully deducted immediately, providing incentives for more. Such a tax also could be imposed on imports and deducted from exports, as other nations currently do with their VATs.
The Tax Policy Center estimates an 8.5 percent consumption tax — by broadening the tax base and boosting output – would boost corporate tax collections as a percentage of GDP to 4.5 percent from the 2.4 percent the White House forecasts for the next few years. (This is the corporate tax plan, by the way, found in Rep. Paul Ryan’s “Roadmap for America’s Future.”)
If we have to have a tax, this seems eminently more workable and less onerous while not killing competitiveness or having corporations seeking other places to locate. And the obvious bonus is it boosts revenue for the Fed – used hopefully to pay down debt, not enact some pie-in-the-sky new entitlement we can’t afford.