Real tax reform starts with the rate

Real tax reform starts with the rate
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By and of itself, a cut in the corporate tax rate won’t cure cancer.

But it will do a lot of other very good things that will help to heal the American economy.

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President Trump promised in his campaign to cut the corporate rate to 15 percent; that would deliver a dramatic boost to our economic health. The United States currently has the highest corporate tax rate in the world, and if you add in the taxes at the state and local levels, the rate averages about 40 percent. Meanwhile, the weighted average rate of our major economic competitors, the so-called OECD countries, is less than 25 percent. And Ireland, a nice place to live and work, boasts a rate of just 12.5 percent — less than a third of the U.S. rate.

Some people mistakenly believe that taxing businesses is a painless way for the government to raise revenue and that it somehow helps force the rich to pay their fair share. In actuality, when corporations or businesses are forced to pay high taxes, they are in turn forced to pass those higher costs on to consumers, cut the wages of their employees or pay less in dividends to their shareholders.

In the meantime, as the world becomes a smaller place and capital becomes easier to move globally, our trade competitors have cut their business tax rates to entice American multinational corporations to move their headquarters — and their tax payments — to their countries.

For America, having the highest corporate tax rate has proved to be a huge burden — not only for the business community, but also for policymakers who need revenue to fund the government.

Thus, American companies that have no interest in moving their operations overseas face stiff competition from companies headquartered elsewhere that can produce goods at significantly lower costs. 

If your company is paying a 35 percent tax rate and your chief competitor is paying a 20 percent tax rate, that competitor can cut prices by 10 percent and still pay their employees or shareholders 5 percent more than you can. It’s a significant advantage in an increasingly competitive global marketplace.

Because of this disadvantage, American companies also often find themselves vulnerable to being bought by their foreign competitors. Those that aren’t being bought by their competitors sometimes decide that it would be far easier just to leave America and set up shop elsewhere.

When American companies leave the United States, that tax base of potential revenue is no longer accessible to the Internal Revenue Service. As the tax base erodes, there are fewer companies that bear the burden, and that  means less revenue for policymakers to spend on vital things such as veterans’ benefits, education and medical research.

We have already seen this happen: Our trade competitors cut their corporate tax rates. American companies decided to move to low-tax jurisdictions, or they agreed to be bought by global conglomerates headquartered elsewhere. America loses jobs, loses access to the intellectual property, loses talent and loses out on the next generation of economic growth.

The new administration, like the administration before it, understands this crisis. And members of Congress in both chambers and in both parties are exploring ways to reform the tax code to make it work better for the American people.

To us, there is a simple answer: Real tax reform starts with the rate. If you make that more competitive with the rest of the world, jobs, talent, intellectual property and multinational companies will beat a path back to America’s front door.

It may not cure cancer, but then again, a stronger American economy can do a lot of things — and curing cancer might be among them.

Elaine C. Kamarck and James P. Pinkerton are RATE Coalition co-chairs.