A report compiled by Ernst & Young comparing U.S. corporate tax rates to the rest of the developed world has found that America’s inefficient corporate tax regime is hurting U.S. competitiveness – namely through double taxation on economic decision making.
According to the report, the U.S. has the second highest top integrated tax rates amongst 38 developed countries, including the 34 members of the Organisation for Economic Development (OECD) along with Brazil, Russia, India, and China (BRIC). The report calculates integrated tax rates by combining corporate-level taxes with investor-level taxes on dividends and capital gains at national and subnational level.
Most developed countries (but not the U.S.) provide some form of relief from double taxation on corporate profits. Double taxation is a drag on the economy because it distorts important economic decisions, including discouraging capital investment which can lead to the misallocation of resources. It also encourages firms to favor debt over equity financing which can leave them vulnerable during periods of economic weakness.
The 2001/2003 Bush Tax cuts were designed to lessen the impact of double taxation in the U.S. through reduced dividend and capital gains rates and put the U.S. on nearly equal footing with competing nations. Since then, other nations have further decreased their tax burden on businesses, while the 2012 fiscal cliff tax hikes resulted in the US integrated tax rate reaching second highest amongst developed nations.
Several reforms have been proposed to reduce the dividend and capital gains tax burden including a 2014 proposal by Former House Ways and Means Committee Chairman Dave Camp and the White House Budget for FY 2016. Unfortunately, none of these proposals would reduce integrated tax rates to levels below the average among OECD and BRIC countries.
The recently released Rubio-Lee tax plan would go some way to placing the U.S. at the forefront of international competiveness. Not only would this plan implement a zero percent tax rate on capital gains, dividends, and interest, it would also reduce the corporate tax rate to 25 percent. In today’s globalized economy, it is vital that a tax code is internationally competitive and this reform would help achieve that.