Commentary

An Easy Rate Cut

In his State of the Union address, President Obama argued that American companies “are hit with one of the highest corporate tax rates in the world. It makes no sense, and it has to change. …Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years.”

Those lines could have been taken from my book, Global Tax Revolution. America is shooting itself in the foot with what is now the highest corporate tax rate after Japan’s recent cut. Our combined federal-state rate of 40 percent is far above the average in the 34 O.E.C.D. nations, which is just 26 percent.

Cutting corporate taxes would be a win for business and labor. It would boost domestic investment and attract more capital from abroad, which would create jobs and increase productivity. Higher productivity would translate into higher wages over time.

A lower corporate tax rate would also allow U.S. companies to better compete in foreign markets. Right now, U.S. firms may be losing business in, say, Brazil, to lower-taxed European competitors. That matters because the better U.S. firms do abroad, the more exports we generate, and the more job opportunities we create at home.

A rate cut would also reduce tax avoidance and evasion. If we cut our federal corporate rate from 35 percent to 20 percent, a huge pool of investment and paper profits would flood back into the United States. Under a lower rate, “loopholes” would be less attractive and the tax base would widen automatically.

Dropping the federal corporate rate to 25 percent would be self-financing as reported profits increased over time. A further cut to 20 percent could be financed by ending unjustified breaks, such as for ethanol.

As businesses started using all the cash they are sitting on to expand their factories, the economy would begin firing on all cylinders. By helping businesses and workers, such reforms would also help fire up President Obama’s political fortunes.

Chris Edwards is director of Tax Policy Studies at the Cato Institute.