By Rebekah Rast
“Our federal tax system is, in short, utterly impossible, utterly unjust and completely counterproductive, [it] reeks with injustice and is fundamentally un-American… it has earned a rebellion and it’s time we rebelled.”—President Ronald Reagan, May 1983, Williamsburg, Virginia.
The government’s answers to America’s problems are to spend and tax.
It is easy to see the results of those tactics: less productivity, limited competition, fewer jobs and a sinking economy.
These negative results not only affect individual citizens, but America’s corporations as well.
America’s corporate tax rate sits as the second highest in the world at 35 percent; second only to Japan, which is currently in the process of lowering its tax rate.
Though individual taxpayers might not be bothered that corporations in the U.S. face such a high tax rate — in fact, many might be in support of it as some corporations that conduct business internationally pay different rates. But the truth is, the corporate tax rate should be of concern to all American citizens.
After all, who do you think corporations pass their taxes on to?
“The corporate tax doesn’t tax corporations, but taxes people. The corporations pass them down,” says Bill Thomas, former Chairman of the House Ways and Means Committee, the tax law writing committee of the House of Representatives.
That alone should make people think that America’s corporate tax rate should be cut. Not only are citizens picking up the costs, but having a high corporate rate makes America much less competitive compared to all other countries.
America tacks on a tax on products that come in and out of the U.S. Most other countries subsidize or have an allowance for their products so they aren’t double taxed.
“We are at a disadvantage with every country with whom we import/export,” former Chairman Thomas says.
Because America’s tax system includes a form of double taxation on products, consumers are often faced with a choice: if you see a German product on the shelf for $5 and the same American product on the shelf for $7, which one are you more likely to purchase?
“The effect is double taxation,” says Johanna Schneider, executive director of external relations for the Business Roundtable. “You have to level the playing field, compete head to head on products.”
Of the 187 corporations at Business Roundtable, more than 95 percent of them conduct business overseas. America would do best to follow the corporate taxation models of other countries so it can be a viable competitor in today’s world.
But instead, Congress passed a new tax package for multinational corporations. This legislation diminishes the actions in the tax code available for U.S. businesses abroad, therefore not allowing them to minimize their tax burden.
“It denies the ability of U.S. organizations to take tax credits,” Schneider says. “This reduces the returns to the U.S.”
Congress wanted to ensure that corporations pay their fair share of taxes into the treasury, but instead they are punishing these businesses.
“The goal of all policy makers is to make the U.S. competitive, yet one of the most uncompetitive laws is the corporate tax,” Schneider notes. “U.S. companies are penalized for bringing money back into the U.S.”
The international tax code is complicated and confusing, much like the U.S. tax code. Thanks to recent action by Congress, this new law on multinational corporations will make it even more complicated.
“They are trying to get money out of multinational corporations,” says former Chairman Thomas. “If they start taking too much then it is not advantageous to the U.S., but detrimental to the U.S.”
By taxing corporations in the U.S. at a higher rate it effectively impacts investment in the country. Schneider says that upwards of 50 percent of revenues in the U.S. come from outside the country. Furthermore, 90 to 95 percent of customers in the world are outside the U.S., she goes on to say.
If the U.S. takes on the highest corporate tax rate in the world, it will be detrimental to the growth, employment and the economy of the country.
“There is a real penalty on investments being done in the U.S.,” says Alan Viard, resident scholar with American Enterprise Institute (AEI). “We are really behind the curve on this when our solution is higher taxes.”
Many countries around the world have lowered their rates from an average of 38 to 27 percent from 1992 to 2006. Under President Reagan, the U.S. corporate tax rate went from 46 to 34 percent, which greatly helped America’s competitive positioning. But in 1993, President Clinton bumped the U.S. corporate tax rate back up to 35 percent, while other countries around the world were working to lower their tax rates.
“The corporate tax rate is harming competition,” says Scott A. Hodge, president of The Tax Foundation. “It should be moved from its current rate which is 35 percent to 20 percent.”
Viard notes that America’s high corporate tax rate doesn’t help with the current high levels of unemployment either.
“It won’t bring jobs home to the U.S.,” he says.
Former Chairman Thomas adds, “If you want to encourage and influence behavior you put credits and tax cuts on it.”
Americans for Limited Government (ALG) President Bill Wilson notes, “If you want to discourage activity you raise taxes. It is particular ironic that this supposed job-focused Obama Administration is raising taxes on some of our nation’s job creators.”
Like personal income taxes, the more people have to pay, the less likely they are to invest or save. Corporations work the same way.
America’s leadership needs to decide if the country is going to dive off the cliff economically or take a few steps back and work to encourage growth and business investments back into the system. America is soon becoming the country with the highest corporate tax in the world. This will do nothing but stop corporations from doing business in America, meaning less revenue, jobs, competition and capital.
There is an urgent need for growth in America. If done effectively, a restructuring of the corporate tax laws in the U.S. would bring growth, sustainability, investment and jobs.
America has seen the ineffectiveness of “Obamanomics.” Maybe it’s time for “Reaganomics” to make a comeback. President Reagan was the last to lower the corporate tax rate in 1986. It is one tax law out of many that deserves to be revamped.
Rebekah Rast is a contributing editor to Americans for Limited Government (ALG) News Bureau.
