Tax Talk: America’s Crippling Corporate Tax Rate

Current Tax Reform Efforts Are Paving The Way To Lower America’s Corporate Tax Rate From One Of The Highest In The World To One Of The Lowest

Taxes play an integral role in a nation's ability to compete, especially in a global economy. In fact, most industrialized countries around the globe recognize that tax rates can determine whether or not businesses succeed or fail.

After all, it's a company's tax structure that often dictates its access to and cost of capital. Capital that can be used to hire new workers, increase wages, or invest in new developments to help expand economies at the local level.

A company’s tax structure can also influence where it chooses to locate its headquarters or its economic activity, capital (physical and intellectual property), and workers.

While it should come as no surprise that lowering the United States' punitive corporate tax rate from one of the highest in the world to one of the lowest is a top priority in current tax reform efforts, it's important to understand why this matters and what it will mean for all Americans.

Today, the United States has the dubious honor of having the highest statutory corporate tax rate in the developed world – an astounding 39 percent tax rate. America’s effective corporate tax rate – the actual rate paid after deductions and credits – is also globally uncompetitive, ranking fourth among G-20 countries.

And, while in recent years other nations have taken steps to cut their corporate tax rates and increase their competitiveness in the global market, the United States’ rates have remained stagnant, keeping American businesses on the sidelines and at a competitive disadvantage.

To stay in the game, American job creators and assets have been drawn to lower rates elsewhere in the world, eroding the U.S. tax base and draining the nation’s economic growth, efficiency, job creation and competitiveness.

A Look At What’s Happening

An Uptick In Inversions:  

Facing globally uncompetitive corporate tax rates here in America, the United States has been bleeding “tax base,” meaning that some U.S. companies have either chosen to “invert” and effectively locate their headquarters in a lower-tax jurisdiction, or have been acquired by foreign companies. Either way, this means a lower corporate income tax base for America, and a greater ability of foreign countries to tax that income. 

• According to a Bloomberg analysis, there has been a significant uptick in U.S. inversions since 2009 with companies shifting their place of incorporation to another country, often with a low or zero corporate tax rate, such as the United Kingdom, Denmark, or Switzerland.

• And, it’s familiar American companies that are making this jump. Household names, like Burger King and Sara Lee, have felt the financial squeeze of competitive pressures and opted to incorporate abroad to access to a lower tax rate. 

• Ultimately, the movements of businesses and business activities to lower-tax jurisdictions abroad means fewer jobs in America.

An Eroding Tax Base:

To avoid getting hit with the highest corporate tax in the developed world, U.S. companies employ sophisticated tax planning techniques allowed in current tax laws both here and abroad that effectively shift where a profit is located to help ensure a smaller tax bill.

Such tax avoidance strategies– often referred to as base erosion, profit shifting, and earnings stripping – have a serious impact on the integrity of the American tax system as a whole.

When the corporate tax base erodes, the nation has less revenue, which opens the door for:

• Higher taxes on other sources, such as individual income and various products and goods;

• Ballooning budget deficits, which hurt the long-term economic growth of the economy; and

• Federal budget squeezes that put pressures to reduce funding on things like education, health, and the welfare of Americans.

The bottom line?

When faced with the highest corporate tax rate in the developed world, American businesses are at competitive disadvantage relative to businesses located in other countries. This is dead drag on the economy, and if this rate is kept on the books, it will continue to hinder job growth, drive away investment and, ultimately, hurt America’s international standing.  This is especially true in a competitive global economy in which corporate tax rates imposed by America’s competitors have trended downward, as other countries compete for economic activity and a corporate base of income to tax.

It’s time to shift course.

That’s why lowering the punitive corporate tax rate from one of the highest in the world to one of the lowest continues to remain a top goal in a tax overhaul. It will keep American job creators globally competitive, make America a more inviting place to do business, promote investment, and increase wage growth for workers. It’s a win-win for all Americans.

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