As of April 1, 2012, the United States has the highest corporate tax rate of any country in the world.
Does it have to be said that this is not a good thing? High rates chase businesses and jobs out of the country. In fact, as a new study by O'Melveny and Myers's Jonathan Sallet and Robert Rizzi found, high corporate tax rates stifle innovation and retard economic growth.
Key findings of the Rizzi-Sallet paper include:
- The United States has continued to adhere to the policy of high corporate tax rates combined with targeted narrow tax breaks. This approach to tax policy creates substantial uncertainty regarding future policies and undermines job creation.
- Firms facing a burdensome corporate tax rate like those in the United States are at a competitive disadvantage against their international counterparts and could potentially "fall behind in innovation and productive capacity."
- A lower federal corporate income tax rate will lead to additional capital investment and greater productivity. This boost in earnings and capital will serve as a direct catalyst for job creation and growth.
- Lower corporate tax rates equal a lower cost of capital while higher rates raise the cost of capital to firms. Studies have shown that companies facing high corporate tax rates will reduce a firm's capital investment.
"Innovation has spurred American growth and economic vitality for decades," said James P. Pinkerton, cochair of the Reforming America's Tax Rates Equitably Coalition and former White House domestic policy adviser to Presidents Ronald Reagan and George H.W. Bush. "By highlighting the importance of lowered tax rates and a simplified code to innovation and its impact on economic growth, Robert Rizzi and Jonathan Sallet have made a critical contribution to the tax reform debate."
"Experts and policymakers on both sides of the aisle agree that a nation's innovative capacity is directly tied to investment, job creation and ultimately, economic growth," said Elaine Kamarck, cochair of the coalition along with Pinkerton and a former adviser to President Bill Clinton and Vice President Al Gore. "The fact that the United States must be the world leader in innovation is yet another subject on which Democratic and Republican lawmakers agree and adds to the growing number of issues related to corporate tax reform on which there is bipartisan consensus."
Something needs to change, and quickly. If Congress fails to act, taxes will increase dramatically at the beginning of next year—including major hikes in the dividend and capital gains tax rates. While that may meet with the approval of the "soak the rich" crowd, the reality is that these tax increases in particular will be very bad for the U.S. economy and could turn anemic growth into a full blown recession.
A bipartisan consensus is developing on Capitol Hill that it's time to reduce the U.S. corporate tax rate, as long as a lower rate goes hand in hand with the reduction or outright elimination of special interest credits and loopholes that distort economic behavior. If the president is looking for a real job creation program, he might want to think about getting behind this idea.
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