Republican tax reformers are expected to propose cutting the federal corporate tax rate from 35 percent to 20 percent. While it may be tempting to dismiss this as just another giveaway to wealthy CEOs, fixing our broken, outdated corporate tax code is an essential ingredient to creating jobs and raising incomes.
Pro-growth policies are desperately needed. This has been the weakest economic recovery since the 1940s. Firm deaths have exceeded firm births since 2008. The low unemployment rate does not count four million working-age Americans who have simply stopped looking for jobs. Median family income remains near 2007 levels. Productivity, which is the most important long-term determinant of living standards, has grown at an anemic 0.6 percent annual rate since 2011. Moms and Dads are working harder, yet falling further behind.
The solution is not more handouts from politicians who cannot even balance the budget, or more red tape that makes hiring workers more expensive. Families need an economy that produces better jobs and higher wages.
This requires corporate tax reform to encourage business investment, which is 88 percent correlated with job creation because firms that build and expand will also hire more workers.
Decades of neglect have left the United States with the most punishing corporate tax code in the developed world. Our 39 percent tax rate (when including state taxes) is nearly twice as high as our competitors. Even after including tax deductions and loopholes for politically-connected corporations, the actual effective tax rate paid by American businesses remains among the world’s highest.
And that’s not all. America is one of the last countries that hits multinational companies with significant double taxation.
Here is how: Imagine companies from America, France, and Germany each open a plant in England. All three companies must pay the British 19 percent corporate tax rate. But Washington slams the American company with an additional 16 percent tax so that it can be assessed the full 35 percent rate (most competitors add at most a token domestic surtax). This puts American companies abroad at an enormous disadvantage. Avoiding this second tax requires either leaving the money abroad (trillions of American dollars are currently parked overseas), or simply moving the company’s headquarters abroad (this is happening at record rates — try naming a major American-owned beer company).
Is it any wonder why it feels like America’s leading exports are jobs and investment?
Since 2000, 33 of the 35 OECD countries have cut their corporate tax rates from an average of 32 percent to 24 percent. The only exceptions have been Chile (which already had a low rate), and the United States that stubbornly clings to its exorbitant 39 percent combined rate.
Clearly, more liberal countries like Germany, Sweden, Greece, and Canada did not slash corporate tax rates out of some cartoonish love for big business. Rather, they did it to benefit their workers. A leading academic analysis of 65 nations over 25 years shows that “a 1 percent increase in corporate tax rates leads to a 0.5 percent decrease in wage rates.”
These nations recognize that a global economy requires competing with neighboring countries for investment and jobs, and they would love for America to continue sitting on the sidelines.
This brings us to the current tax reform debate.
Congressional Republicans are expected to target a 20 percent corporate tax rate (24 percent when including state taxes), and end the double taxation of American companies abroad in order to compete more effectively and bring investment dollars home. Businesses may also be allowed to immediately deduct the cost of new investments, rather than stretch them out over years or even decades. Together, these policies will align our corporate tax policies with other nations, and stop the bleeding of jobs and investment.
But why stop there? Dropping tax rates five points lower than the OECD average would turn America into a global investment magnet. Instead of building walls, let’s tear them down.
Of course, tax reform must be examined within the context of a national debt that is projected to grow from $20 trillion to $92 trillion within 30 years, according to the Congressional Budget Office. Revenues are not the problem. They are expected to grow faster than the economy indefinitely, and are on their way to record levels. Instead, 100 percent of this new debt will come from federal spending soaring from $31,000 to $64,000 per household, adjusted for inflation.
Spending must be reformed. There is no way even surging tax revenues can keep up. But that does not mean we can easily afford large tax cuts either.
Fear not, deficit hawks: The tax reforms described above would modestly shave four percent off these growing long-term tax revenues. Much of this can be offset by closing corporate loopholes, and fixing the tax code’s bias of debt over equity. Revenues from new jobs and investment can also help offset well-designed corporate tax reforms — as they did in Canada.
Ultimately, America will never fix the economy or the budget deficit as long as its tax code sends jobs and investment overseas. Corporate tax reform should be a bipartisan no-brainer.