Clean up corporations’ breaks, loopholes
The point often is made: The United States has one of the highest corporate tax rates in the world. What usually follows is a call for taking the top rate from the current 35 percent to something dramatically lower. Consider President Donald Trump. His team unveiled last week a thin sketch of tax reform, including a proposed 15 percent corporate tax rate.
The argument goes that such a step will help spur growth and job creation. Advocates also note, correctly, that peer countries have been lowering their corporate tax rates the past 15 years. For example, Britain has reduced its rate from 30 percent to 20 percent, Canada, from 28 percent to 21 percent, Germany, from 38 to 29.
So, there is a competitiveness case for enacting lower rates. What deserves highlighting is the effective tax rate here, the average once tax breaks and loopholes join the equation. That rate is 24 percent, according to a Treasury Department assessment.
A recent analysis by the Center for Budget and Policy Priorities pointed to another Treasury calculation: The weighted average corporate tax rate for the other
Thus, a pathway to reform appears clear enough: Eliminate the many tax preferences, or broaden the base, and reduce the rates to a level in line with the trend.
G-7 countries is 21 percent, or hardly a yawning difference. More, the average share of worldwide profits that American multinational corporations pay in taxes here and elsewhere is 28 percent. For companies in the rest of the G-7, the share is 29 percent.
Thus, a pathway to reform appears clear enough: Eliminate the many tax preferences, or broaden the base, and reduce the rates to a level in line with the trend.
Such an approach makes sense in easing the distortions that come with assorted tax breaks. If targeted relief for fledgling and strategic industries can be necessary, the larger aim of a tax system must be driving investment to the most productive areas.
What other countries have learned is that lower rates help spur investment. Those rates have not translated into a surge of growth. Taxes are just one of many elements defining the trajectory of an economy, including education levels and the quality of research and development.
To the extent that peer countries do not tax the profits their multinational corporations make abroad, the United States should follow course, again, as part of improving its position. What also belongs at the front is fiscal responsibility, establishing a top corporate rate that does not bleed revenue.
Unfortunately, that is not the direction outlined by the Trump White House. Projections show that its plans for reducing the rate to 15 percent would cost $2 trillion the next decade. The Center for Budget and Policy Priorities adds that more than half of the benefits would flow to the top 1 percent of households, as so much of the president’s outline would.
Look at near-record corporate profits, and it is hard to see that the corporate tax rate poses a major problem. Still, the corporate tax system need serious reworking. It can be done with competitiveness in mind and otherwise doing what is right for the country.