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The latest news, insights and tips about taxes

Want Jobs? Reform the Corporate Tax System

Everyone agrees our corporate tax system is a mess. But in my view, it’s easy to see how to fix it.

The Problem

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

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?

Comments

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Comments (5 of 46)

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    • Go to his company’s wbeiste (Berkshire Hathaway) and read a few of his annual reports. They are a good read and quite educational. They will give you a good sense of his investment style.WRT being a jackal, I disagree. A capitalist would use all sources to make money. The government is also a player in the game and as it wields more money and power all people of influence will need to modify strategies accordingly.

    • They’ll probably thrsut a VAT on us, but they’ll forget to remove the income tax Hey, let’s just do both Technology and efficiency is constantly putting people out of work, and we keep adding more workers to the work force. In good times, maybe all those surplus workers can become musicians, sell Avon, or become merry maids. But with government screwing things up, higher unemployment/underemployment might progress.Manufacturing of ipods or anything is becoming more and more mechanized it sure seems it will get rougher for the average worker. The good thing is a nice standard of living can be had for not much money. But managing distribution or redistribution of wealth/jobs might make for some angst. Maybe competition would bring more services to more people merry maids and child care for more commoners ? Better care for the elderly? To some degree we’ve already had this problem, with government and unions providing cushy lifetime employment, often for those that might have more trouble competing in the open market. Perhaps a working welfare program would be needed, but they should make less than the privater sector, not much more with early retirement and lifetime super benefits.A vibrant middle class might keep a whole economy humming, but constant trillion dollar stumbles by big government keeps crippling the capitalist/socialist mix we have now.

    • More trickle down BS

    • Cutting the statutory tax rate for corporations below the top individual tax rate would give high income individuals the opportunity to avoid taxes by sheltering their income within a corporation.
      35% is now equal to the top rate on individuals, & is also the corporate rate–although most corporations pay far less–or no taxes even due to all the loopholes & breaks etc.
      This incentive to shelter would be limied if dividends & capital gains were taxed at higher rates.
      We need to take this opportunity to re-write the tax code which allows so much business activity to escape taxation & that favors foreign investments over domestic ones.

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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