High U.S. corporate taxes threaten to reduce competitiveness

While the United States led the world with a corporate tax rate cut in 1986, today it has the second highest corporate tax rate in the 30-nation Organisation for Economic Cooperation and Development (OECD). This has put U.S. firms located overseas at a distinct competitive disadvantage, says Chris Edwards (Cato Institute):

Today, the U.S. corporate tax rate is 40 percent, which includes the 35 percent federal rate and the average state rate.

By contrast, the average rates in Asia, Latin America and Europe are much lower: 30.4 percent, 29.7 percent and 27.7 percent, respectively.

Moreover, many Eastern European countries have sharply slashed their tax rates to attract investment, making U.S. corporate tax reform even more important. Since the late 1990s:

Poland has cut its rate from 40 percent to 19 percent, Slovakia from 29 percent to 19 percent, and Hungary from 33.3 percent to 16 percent.

Other countries such as Greece and the Netherlands have recently announced significant corporate tax reductions.

An unreformed corporate tax will have an increasingly negative effect on U.S.productivity, wages and growth, explains Edwards. Furthermore, the tax's high rate and excessive complexity create an ideal breeding ground for Enron-style tax scandals.

Ideally, the solution is to cut the 35 percent federal corporate tax rate to 20 percent. Congress should proceed with Bush's plan to reform the tax code and replace the income tax with a consumption-based tax, says Edwards.

Source: Chris Edwards, Corporate Tax Reform: Kerry, Bush, Congress Fall Short, Cato Institute, September 2004.

For text http://www.cato.org/pubs/tbb/tbb-0409-21.pdf

For more on Optimal Tax Rates for Growthhttp://www.ncpa.org/iss/tax/

FMF Policy Bulletin/ 02 November 2004