Corporate Tax Madness; Obama's Insistence on High Business Taxes Drives Away Opportunity

Article excerpt


The United States already has the highest corporate tax rate in the world, but the Obama administration is proposing to make the U.S. even less competitive internationally by reducing the corporate tax deferral on income made abroad. Most countries have a territorial system of taxation in which they only tax income made within their borders. The United States is one of the few countries that taxes individuals and companies on their worldwide income. Companies have been allowed, however, to defer taxes on income earned in other countries until it is brought back to the U.S.

Assume for the moment that you have invented an improved LED for lighting. The finished product is small and lightweight and can be shipped anywhere from almost anywhere without transportation costs being a major factor. You are trying to decide where to set up your company and have made a list of countries that have the necessary skills among their workforces. A major factor that will influence your decision is the corporate tax rate. The accompanying table lists the corporate tax rates for selected countries.

Would you select the United States, knowing it has the highest corporate tax rate in the world, is fiscally unstable in that debt is growing far faster than national income, and future taxes are likely to be higher, particularly if President Obama is re-elected? (Note: the tax rates shown are the average for each country. The United States, for example, has a federal corporate tax rate of 35 percent, while state and local corporate income tax rates range from zero to 12 percent, giving a national average of about 40 percent for federal, state and local corporate income taxes.)

Advocates of higher corporate tax rates usually claim it will produce more tax revenue, but many good economic studies question that assumption.

Canada provides a very interesting example. Its experience supports those who think a government can reduce corporate tax rates without reducing tax revenue, up to a point, and that an increase in corporate tax rate would be likely to lose revenue. Canada has been reducing its federal corporate tax rate from almost 30 percent in 1999 to just 15 percent this year. The individual Canadian provinces also tax corporate income, giving Canada a combined average rate of about 28 percent. Rather than falling, corporate tax revenues rose after the rate cut and, more telling, resulted in an increase in federal corporate tax revenues as a percentage of gross domestic product (GDP). …