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"20 Is the New 25" in Corporate Income Tax Reform


Posted by Ryan Ellis on Monday, September 26th, 2011, 4:38 PM PERMALINK


There’s a new coalition that’s been formed to advocate for corporate income tax reform (lower the rates, broaden the base) called the RATE Coalition.  Provided that this is done in (at worst) a tax revenue-neutral way, this is a good thing—a very good thing.  But the question remains—what corporate tax rate is low enough to justify the tax reform endeavor?

The United States has the highest statutory income tax rate in the developed world.  According to the OECD, the U.S. has a marginal corporate tax rate of 39.2% (including state corporate tax rates, which must be done to compare apples to apples across countries).  This ranks us just barely ahead of Japan at 39.5%
 

U.S. corporate rate 39.2%
OECD average 25.5%
OECD average ex-U.S. 25%
European average 24%

It’s clear that the goal should be to beat or at least match the average of our competitors, which is about 25%.  That’s why so many running for office and campaigning for president run on this level.  But it’s not enough.

The OECD says that U.S. states impose an average corporate tax rate of 6.4%.  When integrated with a 25% corporate income tax rate, the U.S. integrated rate would still be at 29.8%, still not beating countries like Ireland, Greece, Switzerland, South Korea, the United Kingdom, Italy, and Canada.  We would barely beat or achieve parity with Germany.  Among our major trade partners, we would only be ahead of France and Japan.  When considering that most or all corporate tax deductions, credits, deferrals, etc. would be lost in the process, this hardly seems worth it.

That’s why “20 is the new 25.”  If the federal rate was reduced to 20%, the integrated federal-state rate would be 25.1%--right where we need to be for competitiveness.  This would also allow more corporate sectors to be “winners” in corporate tax reform, since there are relatively-few companies with average effective integrated rates consistently below 25 percent.

The bottom line is that revenue-neutral corporate income tax reform is probably not worth doing for simply a 25% federal rate.  Other nations have continued to cut their rate (in 2001, for example, the OECD average rate was 31.6%), and our tax reform goal has to change to keep up.

What do you think?  Would a corporate rate of 25% be low enough to make American companies competitive again?

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