Will Obama Call for Cutting the Corporate Rate in SOTU?

 
 
January 25, 2011

In a recent preview of the State of the Union address emailed to supporters, President Obama said his number one focus "is going to be making sure that we are competitive, that we are growing, and we are creating jobs not just now but well into the future."  While these are sure to be popular themes with the American public, the question is what policies will he put forward to achieve those goals?

Although a presidential recommendation to dramatically cut the U.S. corporate tax rate would hardly raise the opinion needle for Frank Luntz's in-studio focus group, it would still be a welcome sign that the administration understands one of the biggest obstacles to U.S. competitiveness, investment, and long-term economic growth.

A recent report by economists at the OECD should give the president's team all the justification they need to support such a recommendation. Titled Tax Policy and Economic Growth, the report reiterates previous OECD findings that:

"Corporate income taxes are the most harmful for growth as they discourage the activities of firms that are most important for growth: investment in capital and productivity improvements."[1]  

The evidence suggests that "lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth."   

As is becoming widely known, next to Japan, the U.S. has the highest overall corporate tax rate among OECD nations. The Japanese government has announced that it will soon lower its corporate rate, leaving the U.S. alone with the highest corporate rate in the industrialized world. This is an indignity that President Obama should not want to happen on his watch.

The chart below, shows how out of step the U.S. corporate rate is compared to the simple average of OECD nations and the weighted average. While the U.S. rate has remained around 39 percent for many years, the simple average of non-U.S. OECD nations was 25.5 percent in 2010 and the weighted average was 30.1 percent.

These non-U.S. averages will fall again in 2011 when Canada's new lower rates are factored in. On January 1st of this year, the Canadian federal corporate rate fell to 16.5 percent from 18 percent.

US Corporate rate compared to the OECD average

[1] Bert Brys, "Tax Policy Reform and Economic Growth," OECD Tax Policy Studies No. 20., Organization for Economic Cooperation and Development, 2010, p. 22.

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