Capital & Credit Watch: U.S. Business Tax Rates Not Competitive

By SBE Council at 17 August, 2012, 4:08 pm

Even during a divisive presidential campaign, there occasionally are moments of agreement on important issues.

Both President Obama and former Massachusetts Governor Mitt Romney agree that the U.S. corporate income tax rate must be reduced. That’s rather amazing.

Currently, the top U.S. corporate tax rate is 35 percent. Add in state corporate income taxes, and the combined average rate in the U.S. is 39.2 percent. That’s now the highest rate among developed economies in the Organization for Economic Cooperation and Development, since Japan lowered its rate in April of this year.

The average OECD corporate income tax rate is 25 percent. So, the U.S. rate is 57 percent higher than the average tax rate among OECD nations.

Keep in mind that this lofty U.S. corporate income tax rate also applies to corporate capital gains.

For good measure, it must be made clear that most corporations rank as small or mid-size firms. According to the latest (2007) firm size data from the Census Bureau, 99.2 percent of corporations have fewer than 500 employees, and 84.8 percent have less than 20 workers. When the issue is taxing corporations; it’s an issue of taxing small business.

Of course, that universe of smaller firms affected by corporate taxes grows still larger when adding into the mix the small businesses whose business and prosperity are tied at least in part to the success of larger U.S. corporations, including those who work for those large corporations.

In a global economy where business and capital are more mobile than ever before, the U.S. desperately needs to make its corporate income tax system competitive with the rest of the world.

President Obama would bring the federal corporate income tax rate down from 35 percent to 28 percent.

Governor Romney has proposed a 25 percent corporate tax rate.

When factoring in the average state rate, the U.S. federal rate would need to come down to 20 percent to be at the OECD average.

The Obama and Romney proposals are both positive steps.

But, of course, other factors must be considered.

For example, will other taxes be increased so that reform winds up raising taxes on corporations? If that were the case, then pro-growth, pro-investment reform would be undermined.

Will U.S. firms continue to be punished for bringing international earnings back to U.S. under the corporate tax code? Again, if so, that’s a negative, undermining the effectiveness of reform.

Also, will all businesses be treated equally? For example, while the President talks of reducing the corporate income tax rate, he also is proposing to raise the top personal income tax rate from 35 percent to 39.6 percent. However, 95 percent of businesses – as, for example, sole proprietorships, partnerships, S-Corps, and LLCs – pay the personal income tax, rather than the corporate tax.

Business competitiveness and making the U.S. more appealing in terms of allocating capital mean that income tax rates must be lowered for all types of businesses.

U.S. Rep. Paul Ryan, now Romney’s vice presidential running mate, offered the right plan, namely, top personal and corporate income tax rates of 25 percent, a territorial system for taxing the international earnings of corporations, and the elimination of individual capital gains, dividend and death taxes. That’s pro-investment, pro-small business, pro-competitive and pro-growth.

 Raymond Keating is chief economist for the Small Business & Entrepreneurship Council