Taxes Matter IX: U.S. Effective Corporate Tax Rate on Par with Uzbekistan

Kukeldash Madrassa, Tashkent
Creative Commons License photo credit: upyernoz

A distressing new study by well-respected Canadian tax economist–Duanjie Chen and Jack Mintz–for CATO found that the effective U.S. Corporate Tax was 34.6 percent in 2010 (pdf).  The U.S. corporate rate is the 4th highest among all OECD countries and on par with Uzbekistan (34.9 percent).  That’s what it says . . . Uzbekistan!

Also, I’m glad to see them recognize the destructiveness of state sales taxes:

State governments also play an important role in business tax policy. Unfortunately, the average state corporate tax rate has not been cut in at least three decades, despite major reductions around the world since then. Furthermore, state retail sales taxes impose substantial burdens on capital purchases, which undermines investment and productivity. Thus, sales taxes should be reformed to remove taxation on business inputs.

This may seem to be a minor point, but there is a clear movement among state-based policymakers that it is OK tax reform to raise sales taxes and cut other taxes.  I disagree and did so time and time again in the recent debate over reforming Maine’s tax system which included a cut in the income tax rate in exchange for a broader sales tax base.  I argued that the sales tax is a job-killer. (pdf)

While cutting the federal corporate income tax rate may seem like a distant dream because of high budget deficit, state can get in on the game by reducing their own corporate income tax rate and/or sales tax rate.  The benefits of doing so are very large.

A growing number of policymakers are recognizing that the U.S. corporate tax system is a major barrier to economic growth. The aim of corporate tax reforms should be to create a system that has a competitive rate and is neutral between different business activities. A sharp reduction to the federal corporate rate of 10 percentage points or more combined with tax base reforms would help generate higher growth and ultimately more jobs and income. Such reforms would likely lose the government little, if any, revenue over the long run.

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