e21 Olympics: Corporate Tax Rate
In the opening event of the inaugural e21 Olympics, the United States got off to a terrible start. Out of the 34 Organisation for Economic Co-operation and Development (OECD) countries, the United States came in last place for its combined federal and state corporate income tax rate.
With a combined statutory rate of 39.1 percent, the U.S. corporate tax rate is over 50 percent higher than the OECD average of 25.5 percent.
The gold medal winner, Ireland, led with a rate of 12.5 percent. Slovenia earned the silver with its rate of 17 percent. A three-way tie for bronze went to the Czech Republic, Hungary, and Poland: all had rates of 19 percent.
The U.S. rate was not always this uncompetitive. Over the last 25 years, most industrialized countries have lowered their corporate tax rates, but the United States has refused to follow this trend. Its combined federal and state corporate income tax rate actually increased since 1988.
The average OECD federal and state corporate tax rate declined 42 percent since 1988—from 44 percent to 25 percent. Ireland has come a long way since the late 1980s to win the gold. Through hard work, it has lowered its rate by 73 percent, over 34 percentage points, to increase its global competitiveness. Results show this hard work has clearly paid off: Ireland’s GDP doubled between 2001 and 2006. Sweden (-61 percent), Austria (-55 percent), and Germany (-50 percent) all saw above-average declines.
The U.S. corporate tax rate is more than triple Ireland’s corporate tax rate. Even the Nordic countries, which tend to have more welfare state policies and are perceived to be less business-friendly, have lower corporate tax rates. Switzerland has a rate of 21 percent, Finland’s is 24 percent, and Denmark’s is 25 percent.
Losing the corporate tax rate race is one reason U.S. multinationals are creating more jobs overseas than in America. According to the Bureau of Economic Analysis, in 2011, U.S. non-banking multinational companies employed 11.6 million foreign workers—50 percent higher than the total from 12 years ago. Domestic employment by these companies slightly declined over the same period, from 23 million to 22 million.
These multinational companies are holding $1.7 trillion abroad because they would lose a substantial portion of their earnings if they brought it home and invested it in the American economy, thanks to the U.S. corporate tax.
Capital is global and increasingly mobile. Because of competitive pressure, corporations seek lower-tax localities to invest. A 2013 study by the nonpartisan Tax Foundation estimated that reducing the federal corporate rate by 10 percentage points would lead to an average of two percent more income for individual taxpayers.
The need to lower the corporate tax rate is one rare area of bipartisan agreement. President Obama, in a 2012 debate with Mitt Romney, argued that "our corporate tax rate is too high, so I want to lower it, particularly for manufacturing, taking it down to 25%.” Former Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Chairman Dave Camp (R-MI) have also supported lowering the tax to about 25 percent. However, Congress and the President have failed to take the steps necessary to make this rate a reality.
It may seem counterintuitive that lowering the corporate tax rate would help shrink the deficit, but if the U.S. rate were more competitive, more companies would invest in America—creating the jobs and increased productivity necessary for economic growth. Long spans of economic growth regenerate revenue lost to tax cuts.
Boston University professor Laurence Kotlikoff studied America’s corporate income tax and found eliminating or lowering it would lead to rapid increases in U.S. incomes. Jim Ratcliffe, chairman and CEO of Ineos Group Holdings, shares this view. In a Wall Street Journal interview he said, “the [U.S] corporate tax rate is too high. Because what you want to do is reinvest. If you weren't paying all that tax, what you'd do is, you'd invest more.”
A lower corporate income tax would also reduce businesses’ incentives to lobby for tax loopholes. This would move competition to the marketplace instead of on Capitol Hill. When the incentive to lobby is decreased, companies put more resources into improving their products and cutting prices—which benefits consumers.
Similarly, a lower corporate tax rate would reduce the need to hire as many corporate tax accountants, increasing efficiency. Businesses would save from lower compliance costs and lower tax payments. Competition would encourage them to lower prices, benefitting consumers.
This is only the first of several events in the e21 Olympics. Despite America’s disappointing start, it is not yet out of contention. Make sure to check back tomorrow for the results of the GDP growth competition and an updated medals table.
*The e21 Olympics are in no way affiliated with the International Olympic Committee