Chairman Paul Ryan put out the blueprint for his FY2015 budget on Tuesday. I will have more to say about it in the next few days, but first I’ll focus on one idea in his budget: reforming our tax system and, specifically, reducing the U.S. corporate-tax rate from 35 to 25 percent and shifting from a worldwide tax system to a territorial system. These are very good policy proposals.
For several years now, the U.S has been leading with the developed world with the highest corporate-income tax rate. The chart below illustrates this sad record:
The extremes of that chart, reflecting 2013 rates, haven’t changed since 2011: National statutory corporate-tax rates among the 34 members of the OECD range from 8.5 percent in Switzerland to 35 percent in the United States.
Despite having the highest national statutory rate, the United States raises less revenue from its corporate tax than the other members of the OECD on average. In fact, the federal corporate-income tax raised just (roughly) 10 percent of total federal tax revenues in 2013.
To make matters worse, yesterday marked a sad anniversary: the second year in a row where the U.S. not only has the highest statutory rate but also has the highest combined rate (39.2 percent) when both the federal and average state rates are added. Japan used to hold the record for combined rates (39.8 percent), until it lowered its combined rate to 36.8 percent in April 2012.
Adding insult to injur: The United States taxes corporations on a worldwide basis, meaning profits made by an American-owned computer plant are subject to American taxes whether the plant is located in Lubbock or Limerick. By contrast, most wealthy countries don’t tax foreign business income — about half of OECD nations have “territorial” systems that tax firms only on their domestic income, a fact that Chairman Ryan highlights in his budget.
As my colleague Jason Fichtner(who suggested I update the above chart for this year) pointed out during his testimony before the Senate Finance Committee last year, the combination of high rates, worldwide taxation, and a competitive global marketplace makes our corporate tax system extremely harmful to U.S. competitiveness.
Congress has indeed been subjected to pressure from U.S. corporations trying to compete abroad, who complain about this issue. But rather than doing the right thing and reforming the tax code, Congress resorts to periodically granting tax breaks to corporations for bringing their foreign income home and granting a tax credit for the share of the taxes paid to foreign governments. Corporations are able to use these tax breaks can lower their effective tax burdens, and there’s nothing wrong with that per se.
But two wrongs don’t make a right. Corporations shouldn’t have to keep their money abroad to avoid a punishing tax regime. Reforming the corporate tax system in the way proposed in the Ryan plan — by lowering the corporate income tax rate and moving to a territorial tax system — would be a good first step to addressing this problem. It would certainly improve U.S. competitiveness and unleash our economic potential. It would also simplify an incredible complex system and reduce the incentives to resort intricate, albeit legal, tax structures to avoid the costs of the current system. Everyone would win.
Let’s hope Congress listens — otherwise, we’ll be putting a third candle on our Highest Corporate-Tax Rate cake next year.