U.S. Corporate Tax Rate the Highest
Japan has announced that it will cut its corporate tax rate by five percentage points. Japan and the United States had been the global laggards on corporate tax reform, so this leaves America with the highest corporate rate among the 34 wealthy nations of the Organization for Economic Cooperation and Development.
That is not a good position for us to be in. Most of the competition faced by U.S. businesses comes from businesses headquartered in other OECD countries. America also competes with other OECD nations as a location for investment. Our high corporate tax rate scares away investment in new factories, makes it difficult for U.S. companies to compete in foreign markets, and provides strong incentives for corporations to avoid and evade taxes.
The chart shows KPMG data on statutory corporate tax rates in the OECD for 2010, but I’ve also put in the new lower rate for Japan. With the Japanese reform, the average rate in the OECD will be 25.6 percent. That means that the 40 percent U.S. rate is 56 percent higher than the wealthy-nation average.
Most fiscal experts agree that cutting the U.S. corporate tax rate is a high priority, and President Obama’s fiscal commission endorsed the idea. If the president wants to get the economy firing on all cylinders–and generate a new pragmatic and centrist image for himself–he should lead the charge to drop the corporate rate to at least 20 percent.
With state-level taxes on top, a federal corporate rate of 20 percent would put America at about the OECD average, and give all those corporations sitting on piles of cash a great reason to start investing again.
Dan Mitchell’s comments are here.
Buy Global Tax Revolution here.
The Bogus Charge of ‘Shipping Jobs Overseas’
In the final push before Election Day, President Obama has been traveling the country criticizing Republicans for favoring tax breaks for U.S. companies that supposedly ship U.S. jobs overseas. It’s a bogus charge that I dismantle in an op-ed in this morning’s New York Post:
The charge sounds logical: Under the US corporate tax code, US-based companies aren’t taxed on profits that their affiliates abroad earn until those profits are returned here. Supposedly, this “tax break” gives firms an incentive to create jobs overseas rather than at home, so any candidate who doesn’t want to impose higher taxes on those foreign operations is guilty of “shipping jobs overseas.”
In fact, American companies have quite valid reasons beyond any tax advantage to establish overseas affiliates: That’s how they reach foreign customers with US-branded goods and services.
Those affiliates allow US companies to sell services that can only be delivered where the customer lives (such as fast food and retail) or to customize their products, such as automobiles, to better reflect the taste of customers in foreign markets.
I go on to point out that close to 90 percent of what U.S.-owned affiliates produce abroad is sold abroad; that those foreign affiliates are now the primary way U.S. companies reach global consumers with U.S.-branded goods and services; and that the more jobs they create in their affiliates abroad, the more they create in their parent operations in the United States. If Congress raises taxes on those foreign operations, it will only force U.S. companies to cede market share to their German and Japanese (and French and Korean) competitors.
I unpack the issue at greater length in a Free Trade Bulletin published last year, and on pages 99-104 of my recent Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization.
U.S. Antidumping Regime Restrains U.S. Export Growth
In honor of World Trade Week—and for its decreed purpose of educating Americans about trade—this post is about U.S. trade policy working at cross-purposes with other policies or goals of the administration. So numerous are these examples of trade policy dissonance, that a committed wonk could devote an entire website to the task of documenting them.
If the administration were serious about making trade policy work—rather than just paying it lip service—it would compile its own exhaustive list of laws, regulations, policies, and practices that actually undermine its stated objectives of facilitating economic growth, investment, and job creation through expanded trade opportunities. Then, it would make the changes necessary to ensure that our policies are paddling in the same direction. But that is not happening—at least as far as I can see.
Obama’s Big Tax Hike on U.S. Multinationals Means Fewer American Jobs and Reduced Competitiveness
The new budget from the White House contains all sorts of land mines for taxpayers, which is not surprising considering the President wants to extract another $1.3 trillion over the next ten years. While that’s a discouragingly big number, the details are even more frightening. Higher tax rates on investors and entrepreneurs will dampen incentives for productive behavior. Reinstating the death tax is both economically foolish and immoral. And higher taxes on companies almost surely is a recipe for fewer jobs and reduced competitiveness.
The White House is specifically going after companies that compete in foreign markets. Under current law, the “foreign-source” income of multinationals is subject to tax by the IRS even though it already is subject to all applicable tax where it is earned (just as the IRS taxes foreign companies on income they earn in America). But at least companies have the ability to sometimes delay when this double taxation occurs, thanks to a policy known as deferral. The White House thinks that this income should be taxed right away, though, claiming that “…deferring U.S. tax on the income from the investment may cause U.S. businesses to shift their investments and jobs overseas, harming our domestic economy.”
In reality, deferral protects American companies from being put at a competitive disadvantage when competing with companies from other nations. As I explained in this video, this policy protects American jobs. Coincidentally, the American Enterprise Institute just held a conference last month on deferral and related international tax issues. Featuring experts from all viewpoints, there was very little consensus. But almost every participant agreed that higher taxes on multinationals will lead to an exodus of companies, investment, and jobs from America. Obama’s proposal is good news for China, but bad news for America.
Obama ‘Offshore’ Tax Plan Will Cost U.S. Companies Business and Jobs
The Obama administration is ready to follow through on campaign promises to crack down on U.S. companies that “ship jobs overseas.” The administration announced this weekend that it would seek to raise taxes on the so-called active earnings of U.S.-owned affiliates abroad. According to a front-page story in this morning’s Wall Street Journal:
Under current law, U.S. companies can defer taxes indefinitely on the many of the profits they say they have earned overseas until they “repatriate” that money back to the U.S. The administration seeks to sharply limit the tax deductions that companies taking advantage of deferral can take.
Of course, there is a perfectly good reason why we don’t tax what U.S. companies earn and keep abroad: those companies are already paying taxes in the countries where their affiliates are located, and at the same rates that apply to multinationals from other countries competing in the same markets.
As I pointed out in a Cato Free Trade Bulletin in January, locating affiliates in foreign markets is now the chief way that U.S. companies reach new customers outside the United States. If we sock them with the relatively high U.S. corporate rate, U.S. companies will be less able to compete against German and Japanese multinationals in the same markets who need only pay the (almost always) lower corporate rate assessed by the host country. And as I noted in January, any jobs created at affiliates abroad tend to promote more employment at the parent company back in the United States.
This demagogic grab for more revenue will only cripple the ability of U.S. companies to expand their sales in global markets, putting in jeopardy the U.S.-based jobs that support their foreign affiliates.
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