While U.S. fiscal policy has been directionless, many of our international competitors have initiated dramatic tax reforms that put them at a distinct advantage for attracting outside investment and attendant job growth. Consider that 12 of the 30 nations in the Organization for Economic Cooperation and Development have capital gains tax rates of zero; meanwhile, Congress is dithering about extending our 15‐percent capital‐gains tax rate. And note that while numerous industrial countries — including Australia, New Zealand, and Sweden — have abolished their death taxes, the U.S. death‐tax rate is set to jump to 55 percent in 2011.
Even where the U.S. has instituted encouraging reform — such as the dividend tax rate cut of 2003 — it lags behind its peers. Most OECD countries have lower tax rates on dividends when you measure the total combined corporate and individual burdens. The combined U.S. dividend‐tax rate is 49 percent including state taxes — substantially higher than the OECD average of 43 percent.
Corporate tax rates offer an even more striking comparison. Our high rate of 40 percent is a neon sign advertising America’s hostility to job‐creating capital. U.S. policymakers sat on their hands as the European Union slashed the average corporate tax rate from 38 percent in 1996 to just 23 percent today. If a country stands still in today’s global economy, it falls behind, as Dan Mitchell and I explore in our book, Global Tax Revolution.
America is not a unique free‐market haven anymore, but many U.S. policymakers are oblivious to this new reality. Here is Barack Obama in the first presidential debate responding to John McCain’s idea to cut the corporate tax rate: “There are so many loopholes that have been written into the tax code … that we actually see our businesses pay effectively one of the lowest tax rates in the world.”
It is simply not true that our effective corporate tax rate is “one of the lowest” in the world. Effective tax rates take into account statutory rates and elements of the tax base, such as depreciation deductions. In a new Cato Institute brief, Jack Mintz, one of Canada’s top tax experts, finds that the U.S. rate of 36 percent is the eighth highest of the 80 countries studied, and is far above the average rate of 20 percent.