Most of the time being number one is good. But when it comes to having the highest tax rate in the world, it is much better for a country to be bringing up the rear.
Currently Japan holds the inauspicious distinction of having the highest corporate income tax rate in the world (39.5 percent). The United States is a close second, only a few tenths-of-percentage points behind.
Japan will soon fall from the top spot because it has finally recognized what the rest of the industrialized world realized over a decade ago: A low corporate income tax rate is vital for economic growth in the global marketplace. As such, Japan just announced it will reduce its corporate income tax rate by 5 percentage points down to around 35 percent. This remains far above the 25 percent average rate of other industrialized countries, but for them it is a start.
Japan’s reduction will leave the U.S. in the uncomfortable position of having the highest corporate income tax rate in the industrialized world. Hopefully Congress will finally see fit to lower the rate now that we will hold that disreputable title.
The U.S. ended up at the top because it stood still while the rest of the world was cutting its rates. As the chart below shows, in 1990 the U.S. corporate tax rate was middle of the pack. In fact, it was lower than the global average. The years since have seen every other industrialized country aggressively lower its rate.
The top marginal corporate income tax rate is an important factor influencing economic growth and job creation, because it determines how much the tax will reduce the return the business earns from new investment. As a result, it is a large determinant when businesses decide where to locate their next venture—and where they will hire new employees.
The high rate in the U.S. is driving businesses and jobs to other countries. Those jobs will continue to flow to other countries if the U.S. insists on levying its self-defeating corporate income tax rate. It is long past time for Congress to lower the rate so it is equal or below the 25 percent average of our competitors. If it does not, businesses and jobs will continue their exodus to more friendly locales.