On Corporate Taxes, Democrats Wrong Again

Recently Democrats have turned a spotlight on two corporate tax issues: “offshoring” jobs and foreign inversions, where a company moves its headquarters overseas to pay lower taxes. Democrats have proposed treating two symptoms, rather than solving the problems themselves.

Problem 1: High Tax Rates

Since the United States last changed its corporate tax rate – a one percent increase in 1993 – the rest of the world has realized that high corporate tax rates discourage economic growth. Countries in the Organisation for Economic Cooperation and Development have cut their rates by substantial margins – often by 20 percentage points or more. After the 1993 tax increase, the U.S. had the 11^th highest corporate tax rate out of what was then 26 OECD nations. Today, the U.S. has the highest rate. The U.S. federal rate (35 percent) plus average state and local rate (4.1 percent) is 39.1 percent.

U.S. Has Highest Corporate Tax Rate in OECD

Total 2014 corporate tax rate (central and local government)

The corporate tax rate has real effects on real people. A corporation’s tax rate affects the people who work for it and those who are its customers. Any increase in taxes on a business increases that business’ costs, and that cost must be borne by the corporation’s owners, workers, or customers. A CBO study found that workers bear more than 70 percent of the tax burden.

By failing to keep up with our competitors, Washington is keeping taxes too high on corporate workers, owners, and customers.

OECD Corporate Tax Rate Changes, 1993-2014

*Changes to the U.S. rate are due to state and local tax decreases since 1993.

Problem 2: Outdated Tax System

Just as the U.S. is behind the times with its tax rates, its international tax system is also backward. The current worldwide system encourages corporations to keep money overseas and not invest it in the U.S. When they do bring these profits back to the U.S., they are hit with large tax bills. Twenty-six of the 34 OECD nations today have some form of a territorial tax system. Of the OECD nations with a worldwide system, the U.S. has the highest tax rate by far.

“By uniting around the goal to create an internationally competitive tax code, we can keep American job-creators from looking to leave in the first place.”  – Senator Orrin Hatch, May 8, 2014

The issues that Democrats are focusing on will not make us more competitive. Inversions and offshoring of jobs are the result of a convoluted tax code with high rates that pushes corporate investment away from the U.S. Instead of proposing solutions, Democrats are trying to score political points. Their narrow proposals do not address the problem, do not encourage economic growth and investment in the U.S., and do not help workers.