How the U.S. can win the international tax competition

Like consumers who shop around for the best deals, individuals and companies also shop around for the best place to reside and do business. Nations that provide the most competitive tax rates attract firms while those nations with high taxes lose firms, workers, and their tax base. This is particularly true as globalisation knits together separate national economies.

Researchers note how globalisation is putting pressure on the U.S. to reduce tax rates to avoid driving away its tax base. International ‘tax competition’ is increasing as capital and labour mobility rise. American analysts recommend that if the U.S. wishes to keep and attract more multi-national corporations:

The United States should move to get back the business tax advantage it gained in 1986 by immediately reducing its corporate income tax rate from 35 to 20 percent.

Personal income tax rate cuts enacted in 2001 were a step in the right direction for the U.S. tax system, but more must be done – for example, Congress could consider the Nordic approach of retaining the current tax rates on labour income but taxing capital income at a low, flat rate of 10 percent.

The U.S. response to intensified international tax competition must include an overhaul of the worldwide system of business taxation, which greatly complicates business planning and raises taxes on U.S. firms' foreign income above those on firms headquartered in other countries.

Tax reform is long overdue, observers say. The U.S. should aspire to have the best tax system in the world, which it can do by removing the complexity of its corporate and personal income tax code and moving toward a low-rate consumption-based system.

Source: Chris Edwards and Veronique de Rugy, International Tax
Competition: A 21st Century Restraint on Government, Policy Analysis No. 431, April 12, 2002, Cato Institute.

For text http://www.cato.org/pubs/pas/pa-431es.html
For more on Optimal Tax Rates for Growth http://www.ncpa.org/iss/tax

FMF Policy Bulletin\25 September 2002