Many people in both parties agree that the United States needs corporate tax reform, but we have a harder time passing tax reform than our international competitors. Will we succeed this year?
The United States has been blessed with a system of checks and balances that require the House, Senate, and Executive Branch to sign off on new laws. This has the benefit of ensuring that legislation has broad appeal. It prevents much damaging legislation from passing, but it also makes it harder to pass worthwhile legislation.
All other major countries have lowered their rates, leaving the United States with the highest in the world after the United Arab Emirates.
In contrast, other countries can announce new tax laws and they pass right away. British Prime Minister Theresa May can announce that the top U.K. corporate rate will decline to 17 percent in 2020, and she has the power as leader of the ruling Parliamentary party to make it happen.
Prime Minister May and other leaders can lower their tax rates without having to prove revenue neutrality. Canada has steadily reduced its tax rates over the past 20 years without signoff from a Congressional Budget Office—because they do not have one. In contrast, our Congress must consider numerous points of order while passing tax and revenue bills. These rules stem from the Congressional Budget Act of 1974 and later budget resolutions and statutes.
The U.S. corporate tax rate has been at 35 percent since 1993. During the 1970s and 1980s, many other countries had rates in that range, or higher. However, over the past 15 years all other major countries have lowered their rates, leaving the United States with the highest in the world after the United Arab Emirates, according to a new CBO report comparing international tax rates.
Now the OECD average corporate tax rate is 23 percent, Canada’s federal corporate tax rate stands at 15 percent, and the UK rate is 20 percent.
Not only is the U.S. corporate tax an outlier, but U.S. corporations are taxed on their worldwide income—a path taken by only 7 of the 34 Organization for Economic Cooperation and Development countries (including the U.S.). This places America at a competitive disadvantage.
With our high corporate tax rate, reasonable people might believe that our debt as a share of GDP would be smaller than the OECD average. But in 2015, the latest year for which comparable data are available, the United States, at 104 percent, had a higher debt to GDP ratio than all EU countries except 5. The EU had a ratio of 85 percent as a whole. Only Greece (177 percent), Italy (132 percent), Portugal (129 percent), Cyprus (108 percent) and Belgium (106 percent) had a greater ratio of debt. Our rate is the highest since 1948.
The U.S. revenue and tax rules are supposed to be a disciplining process, to make sure we don’t have higher deficits. But the more rules Congress has put on, the bigger the public debt has grown. The problem is that our entitlement spending is out of control and corporate tax code is driving businesses away.
Numerous inversions over the past few years show that companies profit from locating offshore. Medtronic inverted to Ireland by merging with Ireland’s Covidien Companies. Burger King merged with Canada’s Tim Horton’s Donuts. Even our trash companies are leaving: Texas-based Waste Connections merged with Canada’s Progressive Waste Solutions.
America raised $300 billion from the corporate tax in 2016, just 9 percent of all revenue.
If a U.S. company operates in the United States and Switzerland, its domestic affiliate pays U.S. taxes of 35 percent and its foreign affiliate pays U.S. taxes at 35 percent and Swiss taxes at 21 percent. America allows companies to deduct the taxes paid to foreign governments from U.S. taxes owed to the Internal Revenue Service, but this means that corporations always pay the full U.S. rate and are unable to take advantage of low-tax jurisdictions.
A 20 percent corporate tax rate would bring the United States rate below the OECD average, making American firms more competitive. Lower rates would attract jobs back to America. President Trump has proposed a one-time repatriation of corporate profits held offshore at a rate of 10 percent.
America raised $300 billion from the corporate tax in 2016, according to the Office of Management and Budget, just 9 percent of all revenue. And the tax costs millions to administer.
American companies hold offshore about $2.6 trillion of earnings from foreign operations. Some would be repatriated with a lower U.S. tax, adding to investment and employment. These funds could be used for capital projects, dividends/share repurchases, consumption, or job creation – all of which represent a boost to the weak economy.
Under the status quo, firms have every incentive to keep profits abroad and little incentive to repatriate earnings. It’s time for Republicans and Democrats to come together to catch up with the rest of the world by lowering corporate taxes.
Reprinted from The Hill.