Study: Corporate tax rate a drag on economic growth

The U.S. economy could take a hit if Washington policymakers don’t move to lower the corporate tax rate, a new study finds.

The Ernst & Young analysis says that America’s gross domestic product has already taken between a 1.2 and 2 percent hit over the last 25 years, a period when the U.S. corporate tax stayed roughly level while other first world economies lowered their rate.

If those trends continue, Ernst & Young found, GDP could drop another 1.5 to 2.6 percent over the next 25 years — a sign, the study says, that not lowering the corporate rate could have real adverse effects on the U.S. economy.

The report was prepared for the RATE Coalition, a group of corporate heavyweights pushing for a tax overhaul that would reduce corporate rates while eliminating tax preferences — much the same way Washington did in the last successful tax reform in 1986.

The current top U.S. corporate rate is 35 percent, with RATE and others, like House Ways and Means Chairman Dave Camp (R-Mich.) and the Business Roundtable, looking to drop it to 25 percent.

“The new data in today’s report makes clear that the United States needs to replicate that success or risk being outcompeted by our foreign rivals,” Jim Pinkerton, a former aide to Presidents Reagan and George H.W. Bush and RATE co-chairman, said in a statement. “Our corporate tax rate has remained at a standstill while our competitors have lowered theirs by 35 percent. We can’t afford to wait any longer.”

Ernst & Young’s study looked at 19 member countries of the Organization for Economic Cooperation and Development, and found those countries rates had dropped from an average of 45 percent to roughly 30 percent in the last quarter century. The U.S. corporate rate has been at 35 percent for the last 20 years.

The study found that the foreign rate reductions “were prompted in large part by the inexorable forces of globalization and increasing international tax competition as countries attempt to retain and attract highly mobile capital investments by large U.S. and foreign multinational corporations.”

Those declines, the study said, make it more attractive for U.S. companies to invest abroad and discourages foreign investment here. Over a 25-year span, the corporate tax rate disparities could lower real wages by a percent.

Still, the study’s estimated long-term GDP drop amounts to about 0.1 percent a year, though Ernst & Young also says that most of the impact would be in the first decade. For comparison’s sake, the Congressional Budget Office has estimated that sequestration could cause a 0.6 percent drop in GDP for fiscal 2013.

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