Japan, Germany Flirting with Corporate Tax Rate Reductions

September 5, 2006

We recently released a report which showed that the U.S. has the second-highest statutory corporate tax rate (39.3 percent combined federal and state) in the OECD. The U.S. achieved this status by keeping its rate unchanged will other OECD nations aggressively cut their rates. Japan (39.5 percent) and Germany (38.9) have the first and third highest statutory rates, respectively.

It won’t be long, however, until our inaction gives us the highest rate in the world. Recent news stories indicate that Japan and Germany could both reduce their corporate tax rates in the near future. An article in today’s Daily Tax Report indicates that the Japanese Finance Ministry may recommend a corporate tax rate as part of its FY 2007 tax reform proposal. A recent Bloomberg story reported that new German Chancellor Angela Merkel continues to push for a 29 percent rate in 2008, though her coalition partners may demand corporate tax base broadening (which would be a good development in any case) to make up lost revenues.

With the second highest corporate tax rate in the OECD and a worldwide system of corporate taxation that is at odds with the territorial system used by many countries in the OECD, the U.S. corporate tax system will soon be one of the worst–structurally speaking–in the global market. Martin Sullivan recently discussed some of these corporate tax issues in a Tax Foundation podcast, which you can access by clicking here.

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