October 27, 2008

Business Taxes Increasingly Out Of Line

This commentary was published in the Worcester Business Journal on October 27, 2008.

This November, folks in Massachusetts will be voting on an initiative that would repeal the state’s 5.3 percent individual income tax.

There are legitimate concerns about increasing tax burdens, declining business climates, and out-of-control spending in many states.

Yet, no matter how one votes on the initiative, Massachusetts, and the rest of this nation, need to start thinking beyond its borders when it comes to tax policy.

Study Hall

A study from the Organisation for Economic Co-Operation and Development (OECD) last month shows that the U.S. corporate tax rate is now 50 percent higher than the average among our friends in the industrialized world. Only Japan has a higher rate than us.

If each of the 50 states were treated as countries, 23 of them would have a higher combined federal-state corporate tax rate than Japan. Massachusetts would have the fourth highest corporate tax rate in the world, behind Iowa, Pennsylvania and Minnesota.

Last month, KPMG released its annual survey of corporate and indirect tax rates for 2008, showing that 23 countries have lowered their corporate tax rates this year, and no nation has raised its rate since last year. Sweden, for instance, announced a series of proposals to improve its business climate, including a plan to cut its corporate tax rate from 28 percent to 26.3 percent to help Swedes return to the job market instead of living off of subsidies.

This comes on the heels of another study from the OECD, showing that corporate taxes are the single most harmful tax to economic growth, more so than personal income or sales taxes.

America has become increasingly uncompetitive not because of any action we have taken but because we have done nothing while the rest of the world has moved ahead.

The Tax Foundation has launched CompeteUSA, a campaign to raise the public’s awareness of America’s high business tax rates and how those taxes have an impact on our competitiveness, wages, and living standards.

But why isn’t there a louder call to reform our corporate tax system during these turbulent economic times?

In this election year, plenty of politicians like to make businesses appear unworthy of any tax relief. But there is a lack of understanding that workers and families ultimately bear the burden of our business taxes. In the form of higher prices, lower wages and poorer return on investment, the federal corporate income tax quietly tapped $3,190 per household. That’s more than the average household spends on restaurant food, gasoline or home electricity in a year.

While Massachusetts should look at its own tax system, continued failure by policymakers to keep up with our top global economic competitors means that we should be very concerned about jobs, capital, and investments moving from high-tax countries to low-tax countries. America must focus not only on the short term fixes in the midst of this financial crisis; we must also revisit a stagnant business tax system that threatens our position within the global marketplace.

Scott Hodge is the president of the Tax Foundation, a nonprofit, nonpartisan organization that has monitored fiscal policy at the federal state and local levels since 1937.

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