By Bill Bischoff
Everyone agrees our corporate tax system is a mess. But in my view, it’s easy to see how to fix it.
The U.S. federal income tax rate on worldwide income earned by big, profitable domestic corporations is 35%. When you add in state and local taxes, it’s about 39% according to the Tax Foundation.
That is at the extreme high end of the global scale (the average for countries in the Organization for Economic Cooperation and Development is only 26%). Our too-high tax rate encourages companies to move operations overseas to places with lower taxes. When operations go overseas, the related jobs go with them. That’s the last thing we need if we’re serious about creating jobs in this country. Unfortunately, the problem is only getting worse. Canada just cut its corporate rate to only 16.5%–less than half our federal rate. Even Japan, the only major industrialized country with higher corporate taxes than us, is poised to make their rate about 5% lower than ours.
Paradoxically, our too-high corporate tax rate is also bad for the U.S. Treasury. As long as companies leave earnings from their overseas operations overseas, they don’t have to pay U.S. taxes. The taxes are deferred until the foreign earnings are repatriated (brought back) to America. Naturally, companies are not very interested in repatriating earnings and triggering higher taxes. By leaving foreign earnings overseas indefinitely and by taking advantage of various legal loopholes in the bloated Internal Revenue Code (corporate welfare), big U.S. corporations are able to drastically reduce their “effective tax rate” (the rate they actually pay on worldwide income). The net effect is that U.S. corporations pay far less than the stated 35% rate to the federal government.
The solution I’d suggest is as simple as the problem: permanently cut the federal corporate rate to somewhere in the 15% to 20% range, which would encourage American companies to locate more operations–and more employees– in the U.S. But wait? Wouldn’t that cripple corporate tax revenues and make the already-huge deficit even bigger? I doubt it. Tax collections would probably go up, because 15% or 20% of a big and growing pie would almost certainly be more than 35% of an ever-shrinking pie. Plus if we add jobs in this country, personal tax collections will go up. That would reduce the deficit.
I think we need to drastically cut the corporate tax rate to create jobs and at the same time kill the corporate welfare hiding in our absurdly complicated tax rules. Why hasn’t this happened already? Too many companies are afraid to give up their corporate welfare even though it isn’t doing them all that much good. And too many politicians are unwilling to give up their belief that higher tax rates mean more tax revenue. But it’s clear that the status quo isn’t working–more evidence that it’s time for a change.
Readers, what do you think?