Improving the U.S. Corporate Income Tax: Lessons from Abroad

June 22, 2006

As the House Ways and Means Committee holds hearings today discussing tax policies to make the U.S. more competitive in the global marketplace, the issue is particularly relevant to Northern Ireland, which is a distinct part of the United Kingdom.

Northern Ireland is bordered to the south and west by Ireland, who now has a 12.5 percent corporate tax rate which has led to a flood of foreign investment into the country—including some investment at the expense of its neighbors. As a result, Northern Ireland is seeking to lower its own corporate tax rate to match that of the Republic of Ireland. From the Belfast Telegraph:

Chancellor Gordon Brown has said his mind is not closed to change on the issue of fiscal incentives for Northern Ireland.

He referred to the question of tax breaks for business during a Press conference as he was rounding off his one-day visit to Belfast yesterday.

His itinerary included meetings with business leaders and political parties, and he faced several calls for an economic boost for the province.

He told reporters at Parliament Buildings that he wanted “to assure people that what we can do economically we will do”.

Pressure has been building in recent months for a range of fiscal incentives such as a cut in the rate of corporation tax in Northern Ireland from the UK-wide rate of 30% to the 12.5% in the Republic of Ireland.

In April, the Government agreed to carry out an independent study into the potential for tax breaks to boost the province’s economy.

Following his meetings with political parties in Stormont yesterday Mr. Brown said the Government was keen to give economic support to the peace process.

“We will continue to look at anything that will be of benefit to the economy of Northern Ireland,” he added.

If a country desires a corporate income tax, it should have as broad a base and as low a rate as possible to ensure economic neutrality between industries. Unfortunately, the United States’ corporate income tax has neither.

The U.S. statutory corporate income tax rate is as high as 35 percent. At the same time, the corporate tax code is riddled with exemptions, credits, deductions, and other special provisions—many of which have no economic rationale except to appease special interests and rent-seeking industries.

Let’s hope this morning’s hearing will lead to the first steps toward a U.S. corporate income tax system that has lower rates, a broader base, and fewer economic distortions.

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