Corporate taxes: 2 percentage points mean the world

In the world of tax policy, it might not seem like a couple percentage points are really that important. How could such a small change matter against the overall economic impact of a massive tax overhaul, such as those being considered by the House and Senate? 

Well, just like you can lose the Super Bowl by two points or the Indy 500 by two car lengths, so could the United States lose out in the world economy over two seemingly trivial percentage points.

{mosads}This week, we’re hearing the proposed 20-percent corporate tax rate is in jeopardy. There are rumblings in Washington that this rate could increase to 22 percent, or even as high as 25 percent.

While this sounds like a small increase, especially compared to the current 35-percent rate, those two percentage points would have a measurable impact on economic growth and the attractiveness of the United States to international business.

How so? Nine other countries in the Organization for Economic Co-operation and Development (OECD) have announced future corporate tax rate reductions. By 2020, if America’s corporate rate lands at 22 percent, plus state and local corporate tax rates averaging six percent, America would have a higher corporate tax rate than nearly three quarters of the OECD. 

“Tax reform should be about putting in place the growth and competitiveness incentives that are appropriate for the foreseeable future,” adds Douglas Holtz-Eakin, president of the American Action Forum. “Given the planned rate reductions among OECD countries, I have to believe that the right tax rate [gets] closer to 20 than to 22 percent.”

At 22 percent, Congress and the administration would have completed this generational undertaking, yet we wouldn’t even break into the middle of the pack, globally-speaking. 

The goal of tax reform has never been to turn the United States into Ireland, which has a 12.5-percent corporate rate.

Rather, the motivator has always been to level the playing field for American businesses and workers; to give Chevrolet the same opportunity to succeed worldwide as Fiat and Volvo and to reinvigorate economic growth here at home. At 20 percent, we’d be better positioned to compete internationally and win.

“Getting [the corporate rate] down to 20 is what we really need to help make U.S. companies competitive, to keep production and employment here in the United States rather than going overseas,” said Joshua Bolten, president of Business Roundtable. 

The corporate rate reduction is — by far — the most pro-growth element of the House and Senate tax reform bills.  According to the nonpartisan Tax Foundation, fully 77 percent of the expected long-run increase in the size of the U.S. economy under the House-passed measure is attributable to the corporate rate cut. 

Similarly, 73 percent of the expected boost to long-term growth under the Senate-passed bill is due to cutting the statutory corporate tax rate to 20 percent.

Tax cuts rarely “pay for” themselves, but the Tax Foundation estimates that for every dollar of revenue forgone due to the corporate rate cuts in the House and Senate packages, between 51 and 55 cents would be recaptured from the resulting economic growth. That’s significant.

Inasmuch as cutting the corporate rate to 20 percent has an outsized, positive impact on the economy, and does so at relatively little net revenue loss to the federal government, settling for a higher rate means forgoing significant economic growth with the federal government gaining relatively little revenue in the process. 

Tax reform isn’t an academic exercise. But academics have long studied the impact of taxation on economic growth and development. There are clearly better and worse ways to tax.

Nine years ago, in a landmark study investigating how to design tax structures to promote economic growth, the OECD concluded: “Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes.”

This, in part, explains why countries around the world have aggressively slashed their corporate tax rates. Over the past 37 years, the average worldwide statutory corporate tax rate has fallen nearly 16 percentage points — a 41 percent reduction. 

“Failing to hold the line on 20 percent would be a huge mistake,” said James C. Miller III, who served as budget director (1985-88) for President Reagan. “In today’s very competitive world market, a couple of percent could mean less robust U.S. expansion, as well as companies leaving a good deal of cash abroad.”

Two extra percentage points may not seem like much, but their impact would leave the U.S. playing catch-up behind the rest of the world. 

Both James Carter and Michael McHugh served as tax policy advisors on President Trump’s transition team. Previously, Carter was a deputy assistant secretary of the Treasury and deputy undersecretary of labor under President George W. Bush. McHugh served in the Senate as an economic advisor for a member of the Finance Committee.