High corporate tax rates are undermining U.S. international
competitiveness. The global economy demands that companies be
flexible and swift in order to remain competitive. High tax rates
deprive companies of both the means and the incentive to take
advantage of new market opportunities or technological changes that
can improve productivity.
Most advanced countries in the world have responded to new
global economic realities by slashing corporate tax rates. The U.S.
stands almost alone in having resisted such cuts, and its corporate
tax rates are now among the highest in the world. Future U.S.
prosperity depends on the willingness of our political leaders to
resist populist anti-corporate dogma and make the necessary
adjustments to keep the U.S. economy competitive.
Tax Cutting Spree
The global tax cutting trend is dynamic and powerful. Consider,
for example, Europe, which has half of the world's 10 largest
economies as well as half of the world's 20 freest economies as
measured by the 2008 Index of Economic Freedom, an annual
publication by The Heritage Foundation and The Wall Street
Over the last decade, almost every member of the European Union
has cut its corporate tax rates. Just in the last five years, over
15 EU members have legislated reductions. Germany has reduced its
corporate tax rate from nearly 40 percent to around 30 percent,
effective January 2008. The U.K. has also cut its corporate rate to
28 percent from 30 percent effective this spring.
Even Europe's old welfare states have joined the aggressive tax
cut parade: Sweden has cut its corporate tax rate to 28 percent
from 60 percent; Norway's rate has dropped over 50 percent to 28
percent; and Denmark's corporate tax rate is now 25 percent.
In the meantime, the U.S.'s top federal corporate tax rate has
not been cut in over a decade. In fact, the last time the U.S.
adjusted its top federal corporate tax rate, in 1993, it actually
increased the rate from 34 percent to 35 percent. Our economy now
has, on average, a statutory corporate tax rate of 39 percent
(including state corporate tax rates, which range from 0 percent in
Washington to 12 percent in Iowa). This average rate is higher than
the rates of all 27 members of the EU.
With such high rates, the U.S. can no longer afford to remain
inactive. In a business environment where capital flows are
extremely mobile, lower tax rates do matter in attracting more
business investment. With the nation's economy slowing, the need to
attract and inspire more business investment has never been
stronger. It is such private investment, not government handouts or
fiscal stimulus packages, that will get the economy moving again.
As President Reagan reminded us, "government must provide
opportunity, not smother it; foster productivity, not stifle it."
America Needs Lower and More Competitive Corporate Tax
A corporate tax cut is a key step toward attracting more
investment capital. A recent Treasury Department study estimated
that a country with a 1 percentage point lower tax rate than its
competitors attracts 3 percent more capital. A reduction of the
federal corporate tax rate would increase firms' productivity and
investment incentives, and ultimately stimulate our nation's
long-term competitiveness by enhancing economic freedom.
America's strength and economic success are based on economic
freedom, which fosters the virtuous cycle of entrepreneurship,
innovation, and growth. This nation's economic freedom has
sustained economic opportunity and prosperity, as well as the
creativity that leads to new products and new jobs.
In the 2008 Index of Economic Freedom, the U.S. economy
scored 80.6 out of a possible 100. The U.S. ranked as only the
fifth-freest economy-behind Hong Kong, Singapore, Ireland, and
Australia-among 157 countries graded along a line from "repressed"
to "free." It is tempting to ask, "What's so bad about fifth
place?" For an economy that aspires to lead the world-and does so
in so many areas-fifth place in anything is a warning. America's
economic freedom rating remains bright, but it is not as bright as
it should be. In fact, America's corporate tax rate is the highest
among the top 10 freest economies in the world and remains, along
with high levels of government spending on entitlements, the
biggest drag on U.S. economic freedom.
Making the situation worse, America's competitors within the top
10 freest economies continue to lower corporate tax rates while our
nation does nothing.
For instance, Hong Kong, the freest economy, just cut its
corporate rate to 16.5 percent from 17.5 percent, and Singapore,
the second freest economy, now enjoys an 18 percent corporate tax
rate effective this year. New Zealand, which stands right behind
the U.S. in the 2008 Index, has a lowered corporate tax
rate of 30 percent as of April this year. America's next-door
competitor, Canada, which ranks seventh in the 2008 Index,
has also joined the tax cut race. Effective January 2008, its
federal corporate income tax rate fell to 19.5 percent from 22.1
percent. Canada will further reduce its tax rate to 15 percent by
Towards Fiscal Freedom
Clearly, U.S. inaction and complacency in improving fiscal
freedom through tax cuts risks the nation's global competitiveness;
America stands still while its competitors are moving forward.
Such inaction is particularly damaging in a time of economic
slowdown. A long-term policy plan that strengthens economic
fundamentals would calm fears among entrepreneurs and restore
confidence in the U.S. economy. There are noticeable differences
between the two presidential candidates on corporate tax policy.
Barack Obama would keep the current 35 percent rate, though he does
promise unspecified breaks for "companies that create jobs in
America." John McCain, by contrast, has promised to cut the
corporate tax rate to 25 percent.
Whichever way the American people vote at the polls, it is a
fact of the market that domestic and international investors will
have the final say on economic growth. A cut in the corporate tax
rate will lead to more investment and a growing economy. Failure to
act will lead investors to look elsewhere, and the American people
will suffer as a result.
Miller is Director and Anthony B. Kim is Policy
Analyst in the Center for International Trade and Economics at The