Treasury Secretary Highlights Importance of Competitive Corporate Tax System

Writing for the Wall Street Journal, Secretary of the Treasury Henry Paulson, Jr. warns that America now has an uncompetitive corporate tax system. Mr. Paulson explains that other nations have been slashing their tax rates — and reaping big rewards — while the United States has been sitting on the sidelines. This means less investment in America, which translates into lower wages for American workers:

[T]he U.S. is once again a high corporate tax country. We now have, on average, the second-highest statutory corporate tax rate (including state corporate taxes), 39%, compared with an average rate of 31% for our top competitors… Ireland, for example, has engineered its own economic miracle, in large part due to a reform program that cut corporate tax rates to a level one-third that of the U.S. And the trend continues. Germany will reduce its total rate from 38% to 30% in 2008. France, Japan and the United Kingdom have signaled they may also lower their corporate rates.

…Business tax policy levers, such as the corporate tax rate, depreciation rates and investor taxes, as well as the taxes levied on small businesses through the individual income tax, should strive towards a similar purpose: to encourage economic growth by reducing the tax burden on additional investments. Yet, the current tax code distorts capital flows, hurting productivity, job creation and our global competitiveness. Take just a few examples. Taxes on capital income raise the price of future consumption and discourage saving and capital formation. Reduced capital formation gives labor less capital to work with and lowers labor productivity, reducing real wages and income.

…Over the past two decades, while U.S. tax law has grown more complicated and our statutory corporate income tax rate has increased, other nations have been reducing their rates to replicate our miracle. A study by Treasury economists estimated that a country with a tax rate one percentage point lower than another country’s attracts 3% more capital. It’s not surprising then, that average OECD corporate tax rates have trended steadily downward.