The United States has the second highest corporate tax rate of any of the 30 countries in the Organization for Economic Cooperation and Development (OECD) – a collection of the most economically developed countries in the world. The federal rate is 35 percent. Add on the average state corporate income tax and United States businesses pay a top rate over 39 percent. This is just below Japan which has a rate slightly over 39.5 percent.
The average corporate income tax rate in the OECD is about 25 percent. The United States’ rate is almost 15 percentage points higher. Of the 30 countries in the OECD, 27 of them have cut their corporate income tax rates since 2000. By standing still, the United States has fallen behind.
The top marginal tax rate is the tax rate a business will pay on new investment, so it is an important determinant for businesses when they make decisions about where to locate new facilities. The high U.S. corporate income tax rate is driving jobs overseas as businesses work to remain as competitive as possible in the global marketplace. It doesn’t help that the United States is the only country in the world that taxes its businesses on the income they earn in foreign countries. Every other country only taxes businesses on the income earned within their borders. A reduction of the corporate income tax rate down to at least the average 25 percent rate in the OECD is long overdue.
Liberals have long argued that a rate cut is not necessary because the effective corporate income tax rate in the United States (calculated by dividing the amount businesses pay in taxes by their income) is comparable to the effective rate in other countries. They claim that all the credits, deductions and exemptions available to businesses drive the effective rate down and therefore the marginal rate is unimportant.
This argument has just been shattered in new study by the Cato Institute. The study found that while it is true that credits, deduction and exemptions lower the effective tax rate, it turns out the effective corporate tax rate in the United States is still considerably higher than international averages. The effective corporate income tax rate in the United States is 35 percent. This is significantly higher than the average of the G-7 countries (29 percent), the average in the OECD (20 percent), and the average of 80 developed nations (18 percent).
There is no way anyone can argue against cutting the rate. There is bipartisan acknowledgement in Congress that the corporate income tax rate must be lowered; Cato’s compelling new evidence shows the need for Congress to act soon before more jobs are lost to foreign countries more welcoming to new investment.
Additionally, a lower corporate income tax rate would also raise the United States’ standing in the Heritage Foundation’s Index of Economic Freedom. In 2010, The United States fell out of the group of “free” countries and for the first time is the land of the “mostly free”. A lower corporate income tax rate would go a long way to restoring the United States to its rightful standing among free nations.