U.S. Should Ax Destructive Tax; Corporate Levy Trashing Returns

Article excerpt

Byline: Richard W. Rahn, SPECIAL TO THE WASHINGTON TIMES

It's difficult to say definitively which tax is the most destructive. The corporate income tax is a leading candidate for causing higher prices to consumers, lower wages to workers and lower returns to investors. It misallocates capital, resulting in higher levels of unemployment and lower levels of economic growth and opportunity, and it taxes income that has already been taxed as least once before.

The 2012 annual rankings of Corporate Tax Competitiveness was published in Canada by University of Calgary and in the United States by the Cato Institute. In the study, authors Duanjie Chen and Jack Mintz of the school of public policy at the University of Calgary present new estimates of effective tax rates on corporate investment for 90 countries. These tax rates take into account statutory rates plus tax-base items that affect taxes paid on new investment, such as deductions for capital depreciation, inventory costs, and interest expenses. The United States is in the uncompetitive position of having the highest statutory tax rate in the world, with a combined federal-state tax rate of about 40 percent. Only the economic basket cases of Argentina, Chad and Uzbekistan have slightly higher effective marginal tax rates. The United States at 35.6 percent has almost twice the average rate (19.4 percent) of the other developed nations.

Other nations have been cutting their corporate tax rates, and some do not even have the tax. Canada has reduced its federal rate to 15 percent versus the U.S. rate of 35 percent. The report notes that even though Canada reduced the federal-provincial tax rate by 31 percent from 2000 to 2010, and despite the 2009 recession, corporate tax revenues have remained roughly constant as a share of gross domestic product. Even Sweden has a much lower rate, and it has just announced a further reduction to 22 percent. The government said in its announcement: This improves the conditions for new jobs and investment in Sweden.

Most large corporations now operate in multiple countries. The boards of these companies have a fiduciary responsibility to their stockholders to minimize costs, including tax costs, in order to maximize profits. Hence, many multinationals have moved their headquarters out of the high-tax United States.

There are some members of Congress and others who do not seem to understand that a corporation is just a legal form for doing business. Most large companies are owned by tens of thousands, or even millions, of different people. Even if you do not own stock directly in a corporation, you probably indirectly own corporate stock through mutual funds or your retirement program. If governments tax corporations at higher rates, the value of your mutual fund and pension is likely to fall. …