Congress needs to deliver on 20 percent corporate tax for America

Congress needs to deliver on 20 percent corporate tax for America
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Congress is embarked on an historic effort to modernize the taxation of corporate income, enhancing the growth and competitiveness of the U.S. economy. A central plank of that effort has been to lower the corporate tax rate to 20 percent. Indeed, 20 percent was advertised as a non-negotiable “line in the sand.” Yet, with just days left this year to reach a conference agreement on tax reform, some have suggested increasing the 20 percent corporate rate embedded in both the House and Senate bills to 22 percent. This is a bad idea that should be rejected.

Congress needs to enact a tax system that will make the United States an attractive location for investment and headquarters of companies both now and in the future. Improved incentives to innovate and invest in the United States are the foundation of much needed improvements in productivity and real wage growth. Those corporate investments are, however, by their very nature long-term activities that must incorporate tax rates into long-term planning.

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At the 20 percent rate, U.S. companies would face a combined federal and average state corporate tax rate of 24.8 percent, accounting for the deductibility of state income taxes. This would have been very competitive in 2000, when the average combined corporate tax rate of the other Organization for Economic Cooperation and Development (OECD) countries was 32.3 percent.

It would have snuck in just under the average of 25 percent in 2010. But in 2017, the combined 24.8 percent rate is one percentage point higher than the 23.7 percent OECD average. Worse, with tax cuts already announced or enacted in nine other OECD countries, the relative disadvantage faced by U.S. companies will grow higher in future years.

Moving from 20 percent to 22 percent is simply a step in the wrong direction and would ensure that the United States remains a laggard in global competitiveness. At 22 percent, or 26.7 percent including state corporate income taxes, nearly 80 percent of the other OECD countries would have lower combined corporate tax rates than the United States after their enacted and announced tax reductions take place.

The stakes are probably higher than a mere comparison of tax rates indicates. The 20 percent rate is one part of a core set of pro-growth improvements in business taxation, including a territorial base, expensing and other investment incentives. These reforms offer the best hope for a middle class mired in a stagnant labor market for far too long.

If Congress chooses to sacrifice the 20 percent rate to preserve distortionary, non-growth tax preferences, it sends the message that all the pro-growth provisions are expendable in the search for political expediency. That would be a betrayal of the historic opportunity that Congress now has.

The United States should have a best in class tax system, one that will attract investment from abroad by both American and foreign companies. It should have rapid productivity growth and a vibrant middle class. Every percentage point that the corporate tax rate is raised above 20 percent in the final tax reform bill is a step away from those ideals and away from the competitiveness that matters for the American worker.

Douglas Holtz Eakin is president of the American Action Forum. He previously served as director of the Congressional Budget Office under President George W. Bush from 2003 to 2005.