U.S. Should Reduce Tax Rates Across the Board

Today, the Tax Foundation published the 2017 International Tax Competitiveness Index, which finds that the United States ranks 30^th out of 35 OECD countries in tax competitiveness and tax neutrality. Specifically, the U.S. ranks 35^th in corporate taxes. Given that the U.S. has not reduced its federal corporate tax rate from 35% since the early 1990s, Congress should lower this rate as soon as possible to encourage additional economic activity.

The United States also ranks 29^th in property taxes, 25^th in individual taxes, and 33^rd in international tax rules. Although the U.S. does rank 4^th in consumption taxes, its unnecessarily high corporate rate harms its overall ranking. The combined U.S. corporate tax rate (including state and local corporate taxes) is 39%, which is significantly higher than the OECD average of 25%.

Congress and state and local policymakers should address this issue by reducing corporate rates and simplifying the U.S. tax code. The Index says that a simple, competitive, and neutral tax code contains low marginal tax rates with few economic distortions and “promotes sustainable economic growth and investment while raising sufficient revenue for government priorities.” To avoid losing businesses and capital to countries with lower tax rates, the U.S. should reduce tax rates across the board.

U.S. Tax Code Is Hurting the Country's Global Competiveness

On September 28 2015, the Tax Foundation released its 2015 International Tax Competitiveness Index (ITCI) and the United States ranks 32^nd out of 34 OECD countries. The ITCI ranks countries based on policies which limit taxation of businesses and investment and seek to raise the most revenue with the fewest economic distortions.

The ITCI says the following regarding the United States’ low score:

There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39 percent (combined marginal federal and state rates). Second, it is one of the few countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 48.6 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

The United States was unable to improve from its 2014 ITIC score. This is likely because the U.S. tax code has remained fairly unchanged since the Tax Reform Act of 1986, when Congress reduced the top marginal corporate income tax rate from 46 percent to 34 percent. Since then, many OECD countries have lowered their own rates, reducing the OECD average corporate tax rates from 47.5 percent in the early 1980s to around 25 percent today. The U.S. government actually raised the top marginal corporate rate to 35 percent in 1993, giving the U.S. the highest corporate income tax rate in the industrialized world.

It is important that Congress use the ITCI to understand and address why many U.S. companies have moved their headquarters abroad. Job creation is essential for a growing economy, and lower tax rates and a competitive tax code would allow for entrepreneurs and businesses to invest in new opportunities. Lowering U.S. tax rates, especially the corporate rate, would not only lead to more jobs and higher incomes. Consumers also would pay lower prices as the U.S. expands trade around the globe.