The U.S. Corporate Income Tax System: Once a World Leader, Now A Millstone Around the Neck of American Business
Special Report No. 136
In the Tax Reform Act of 1986 (TRA’86) the U.S. Congress lowered the top corporate income tax rate from 46 percent to 34 percent, the largest reduction since the tax was enacted in 1909. This change, along with an earlier move in the United Kingdom, started a wave of corporate income tax reduction worldwide.
One of the ironies of tax policy during the Bush presidency is that five years of tax-cutting legislation have left the corporate income tax rate unchanged. Meanwhile, another wave of corporate income tax reduction has swept around the world and is still underway. The United States is not the leader this time around. In fact, the U.S. is lagging behind and now has the highest combined statutory corporate income tax rate among OECD countries.
A review of corporate tax policies in the OECD countries reinforces a theme that is well developed in the economic literature: a nation will not attract new and expanded business and its attendant job creation if its corporate income tax is significantly higher than it is in comparable nations. Therefore, as the U.S. contemplates fundamental tax reform, one of the major goals should be a lower corporate income tax rate.
The President’s Advisory Panel on Federal Tax Reform has done just that in its new report, but possibly with an overly modest rate cut. The panel suggested a 31.5 percent top rate in one plan and a 30 percent top rate in an alternative plan. Both plans would improve the U.S. worldwide ranking, but the U.S. would still be taxing corporate income at a rate well above the OECD average. Lawmakers should consider reducing the federal rate to 25 percent which, when coupled with state corporate income taxes, would almost bring the U.S. rate down to the OECD average of 29.2 percent.