(I am writing a regular column for the Hill Country News and the Jarrell Star Ledger. This is my most recent...)
America is number one again, but hold your applause. Since Japan slashed its corporate tax rate by 5% last week, the United States now holds the title for “highest corporate tax rate” in the world. In this case, our 'number one' status does not bode well for the future of our country.
Although the official U.S. corporate tax rate stands at 35%, combined with state taxes the effective rate is a punitive 39.2%. The world average is 25% and European welfare states are even lower. Having significantly higher tax rate than the rest of the world dramatically reduces the ability of American businesses to compete in what is now a global economy.
Contrary to what the political Left would have us believe, higher taxes do impact behavior and productivity. Part of the justification for so-called 'sin' taxes on items like cigarettes and alcohol is that the higher taxes will reduce use of those items. However, when it comes to taxes on both corporations and individuals, proponents always assume those targeted will maintain the same levels of profitability. But that's just not the way it works in the real world.
Historically, higher rates of taxation actually reduce revenues. High tax proponents claim that revenues do not change much as a percentage of the Gross Domestic Product, however, such claims often ignore the changes in total GDP due to increased economic activity. While the percent of GDP may remain unchanged or even fall, increases in GDP mean bigger revenue slice from a bigger pie. After Ireland slashed corporate taxes from 50% to 12.5%, its economic growth doubled that of the United States and tax revenues soared until the global recession. (Unfortunately, Irish politicians went on an unrestrained spending spree and now the country is struggling under massive debt; sound familiar?)
But our highest rate status is not the only problem with the U.S. corporate tax law. Not all companies pay the top rate since our government is very much in the business of choosing winners and losers. Companies in the 'right' industries pay little or nothing, while demonized businesses, such as ExxonMobil pay a whopping 45%.
Supposedly President Obama has proposed cutting the corporate rate from 35 to 28%, but, as seems to be the case with any of this administration's proposals, there's a catch. Obama's plan will further increase penalties on new investment and increase taxes on companies competing in the global market. His 'reform' will effectively impose $250 billion in additional taxes on corporations. And while the President's plan closes some loopholes, it creates a whole new set of loopholes for a new set of 'favored' industries.
While we wish the President would look to the policies of successful job-creation states like Texas (which created more than half of all jobs in the US over the past two years,) Obama clearly prefers what he calls 'government investment' over private investment. Never mind that according to various CBO figures, the average cost for a job 'created' by recent so-called government 'stimulus' programs is $407,241.*
Although there are relatively successful areas like Texas, current federal tax rates are already inhibiting growth and preventing repatriation of overseas profits. If the President gets his way and the federal government increases the penalties for economic activity, the bottom line is that there will be even fewer jobs for Americans.
Just another reason to hope for change in November 2012.
*There are numerous estimates for the average cost of creating a job via the government: Some are as low as $228,000, some say $586,428, and I've seen a few claiming nearly $1 million. Since our federal government is not exactly transparent, and no-one has a clear answer as to how many jobs the government 'created,' it's really hard to pin down...