Politics & Policy

Beating Business

Tax, that is.

When it comes to any sort of crisis, politicians can be counted on to do two things: Monday-morning quarterbacking and proposing solutions that only seem to patch up things in the short term. The same can be said about politicians in this latest financial crisis: Republicans and Democrats blaming each other in an election year, while focusing on a multi-billion-dollar bailout.

The United States faces many negative economic indicators — a volatile stock market, a housing-bubble burst, increasing unemployment, and high gas and food prices. But the discussion centering on policies that act as economic “band-aids” isn’t adequate in this very important presidential election year.

#ad#This Friday, John McCain and Barack Obama will face off in the first of three presidential debates, focusing on foreign-policy issues. While the debate will probably center on issues of war, peace, and national security, a crucial question at the intersection of foreign and economic policy should be asked of the candidates: In the midst of this financial crisis, what would you do to ensure America’s economic global competitiveness?

Last month, a new study from the Organisation for Economic Co-Operation and Development (OECD) shows that for the 17th consecutive year, the U.S. corporate tax rate is now 50-percent higher than the average among our counterparts in the industrialized world. Nine key trading partners cut their rates during 2007, and only Japan has a higher rate than the U.S. among OECD nations.

This comes on the heels of another recent OECD study showing that corporate taxes are the single most harmful tax to GDP growth, more so than personal-income taxes or consumption taxes. That’s why the Tax Foundation has launched CompeteUSA, a campaign to raise the public’s awareness of America’s high business tax rates and how those taxes have an impact on our competitiveness, wages, and living standards.

Last week, KPMG released its annual survey of corporate and indirect tax rates for 2008, showing that the U.S. corporate income-tax rate was higher than all other global regions, 14.1 percentage points higher than the global average and nearly 17 percentage points higher than the average among European Union nations. According to that report, 23 countries have lowered their corporate-tax rates this year, and no nation has raised its rate since last year. For instance, Sweden announced a series of proposals to improve its business climate, including a plan to cut its corporate tax rate from 28 percent to 26.3 percent to help Swedes return to the job market instead of living off of subsidies. If the Swedish government now recognizes that taxes matter to a country’s business climate and incentives to work, it’s time for America’s political class to do the same.

But one of the problems is a lack of understanding that, ultimately, people pay all taxes. Politicians like to make corporations appear unworthy of any tax relief, but workers and families ultimately bear the burden of our business taxes. The federal corporate income tax quietly taps family pocketbooks for nearly $370 billion per year in the form of higher prices, lower wages, and poorer return on investment. In 2006, that burden averaged $3,190 per household. That’s more than the average household spends on restaurant food, gasoline, or home electricity in a year.

Continued failure by U.S. tax policymakers to keep up with our top global economic competitors means that we’re solidifying a trend that will result in our children and grandchildren not seeing the economic growth we’ve seen in our lifetimes. There’s a real impact for Americans as we continue to sit idly by while other countries improve the way they do business, and we should be very concerned about jobs, capital, and investments moving from high-tax countries to low-tax countries. This is a long-term problem that needs long-term vision to solve. America can no longer afford to have a stagnant business-tax system that threatens our position within the global marketplace.

– Scott Hodge is the president of the Tax Foundation, a nonprofit, nonpartisan organization that has monitored fiscal policy at the federal state and local levels since 1937.

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