America’s Anti-Competitive Corporate Income Tax

The Wall Street Journal editorializes about America’s corporate income tax, which now has the dubious honor of imposing the highest rate in the developed world. This punitive system is bad for workers, as the WSJ notes, but it is even counter-productive for politicians because the high tax rate probably results in less tax revenue:

At least 25 developed nations have adopted Reaganite corporate income tax rate cuts since 2001. The U.S. is conspicuously not one of them. …Even in France, of all places, new President Nicolas Sarkozy has proposed reducing the corporate tax rate to 25% from 34.4%.

What do politicians in these countries understand that the U.S. Congress doesn’t? Perhaps they’ve read “International Competitiveness for Dummies.” In each of the countries that have cut corporate tax rates this year, the motivation has been the same — to boost the nation’s attractiveness as a location for international investment.

Germany’s overall rate will fall to 29.8% by 2008 from 38.7%. Remarkably, at the start of this decade Germany’s corporate tax rate was 52%. All of which means that the U.S. now has the unflattering distinction of having the developed world’s highest corporate tax rate of 39.3% (35% federal plus a state average of 4.3%), according to the Tax Foundation.

…Lower corporate tax rates with fewer loopholes can lead to more, not less, tax revenue from business. …Tax receipts tend to fall below their optimum potential when corporate tax rates are so high that they lead to the creation of loopholes and the incentive to move income to countries with a lower tax rate.

Ireland is the classic case of a nation on the “correct side” of this curve. It has a 12.5% corporate rate, nearly the lowest in the world, and yet collects 3.6% of GDP in corporate revenues, well above the international average. The U.S., by contrast, with its near 40% rate, has been averaging less than 2.5% of GDP in corporate receipts. …[M]ost economists understand that corporations don’t ultimately pay any taxes. They merely serve as a collection agent, passing along the cost of those taxes in some combination of lower returns for shareholders, higher prices for customers, or lower compensation for employees. In other words, America’s high corporate tax rates are an indirect, but still damaging, tax on average American workers.