By Wendy Young |
President Obama's corporate tax plan reminds me of the movie The Good, The Bad, and the Ugly. In the movie, Clint Eastwood plays Blondie, who famously states, "You see, in this world there's two kinds of people, my friend: Those with loaded guns and those who dig."
Politicians, and a few others, hold the guns in America. Ideally, lawmakers try to improve the lives of "those who dig" through policy decisions, such as reforming the corporate tax code. However, the president's plan is only a small step forward, and falls short of improving the lives of American workers and businessmen. The proposal is a little good, some bad, and a whole lot of ugly.
The good part lowers the corporate tax rate from 35 to 28 percent. After allowing the corporate tax rate to remain stagnant at 35 percent for nearly 25 years, other companies have shifted operations to lower-taxing countries. For example, in 1960, the U.S. had 17 of the 20 largest firms in the global economy. Presently, the U.S. has six.
In theory, lowering our tax rate will incentivize other countries to bring business operations back to the United States. The president also noted the tax base should be simplified, broadened, and loopholes should be closed. These ideas should be applauded. Unfortunately, the bad and the ugly quickly outweigh these positives.
Slashing the corporate tax rate from 35 percent to 28 percent seems significant, but the average for countries belonging to the Organisation for Economic Cooperation and Development is 25 percent. Even at a reduced 28 percent, we only move from having the second-highest rate to the fourth-highest. Very quickly, "slashing" of the corporate tax rate does not seem as impressive.
Most importantly, the president's proposal completely ignores a glaring impediment to economic growth and job creation in the current corporate tax system. The United States is one of a handful of OECD countries that still uses a worldwide tax system, instead of a territorial system.
Under a worldwide system, American firms pay a toll to bring foreign profits into the United States. In order to compete with international firms exempt from this law, domestic firms have to either raise prices or lower expenses, like the wages they pay employees.
This structure robs everyone of potential wealth. It encourages firms to leave profits abroad, instead of reinvesting them in U.S. research, development, jobs, and other economic-generating activities.
Lawmakers should push for a territorial system that protects business from this type of double taxation, and a lower rate in line with the OECD's average.
About Nick Tuszynski Fellow at George Mason University's Mercatus Center
William McBride Economist at the Tax Foundation
Ryan Ellis Tax Policy Director at Americans for Tax Reform