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You Want Economic Recovery? Look at Our Corporate Tax Rate.

Jimmie | January 3, 2009 | Comments (0)

Steve Forbes says what should be obvious:

If the incoming Obama Administration is serious about squeezing more money from businesses, it should follow the example of Ireland and slash corporate tax rates. The U.S. has one of the highest profits levies in the developed world: 35% at the federal level, with another average of 5% from state and local taxes. Only Japan has worse. In contrast, Ireland’s rate is a mere 12.5%…

But the accompanying table tells an eye-opening tale: Ireland’s corporate tax take as a portion of its economy is higher than that of the U.S. High rates breed pressure for ever more complicated exemptions and ever more ingenious ways to avoid Uncle Sam’s tax bite. But an Irish-like rate leaves companies to focus brainpower on growing their businesses instead of on jousting with tax collectors.

There are two things to consider here. First is the economic reality that corporations don’t ever pay taxes. Shareholders – folks like you and I – do. In 2006, Gallup reported that 63 percent of all Americans owned stock in some form or another (individually, a mutual fund, a self-directed 401(k), etc). Our high corporate tax rate is coming out of their pockets and retirement funds. It is deceasing the amount of money on which they can retire and from which they can draw in a financial emergency. When Barack Obama and his fellow Democrats talk about sticking it to the corporations, they’re really talking about sticking it to the overwhelming majority of Americans.

The second thing to consider is that the high tax rate has a tangible cost beyond the cost of the tax. Companies have to hire fairly expensive tax professionals and take a non-trivial amount of time to not only figure out how much taxes they owe, but how to reduce their tax liability. That is time and money that could be used to build better products, market those products more effectively, increase efficiency, and innovate. Most importantly to our current economic situation, high tax rates drastically reduce the amount of capital a company has to spend on equipment, raises, and new employees.

Actually, there’s a third thing to consider, and I nearly forgot it until just now. It’s obvious, but so obvious that it frequently gets overlooked. High tax rates drive companies out of the United States because our combined corporate and state tax rates make us one of the most expensive places in the world to do business. How many companies that have moved themselves off-shore in the past ten years have done so mainly to take advantage of lower corporate tax rates? This past September, Britain lost three companies in one week and those are only the most recent companies to flee. Britain’s corporate tax rate is lower than ours, so what makes us think that our companies will stay under a more oppressive tax regime? And it’s not just big corporations that feel the tax chomp. Small businesses feel it, too.

If we hope to get out of our economic troubles sooner rather than later, we’re going to have to drop our corporate tax rates. In one move, we can make our companies competitive, drop a huge amount of capital back into our economy, and free our businesses to do the innovating that have kept us at the top of the economic heap for a very long time.

(via Mark Steyn)