Through 2011, the United States had the second-highest combined corporate tax rate among advanced economies, according to a new report from the Congressional Budget Office.
Actually, it’s worse than what the CBO says. Japan lowered its rate last year, and the US is now on top with an average combined rate — one including national and regional taxes — of 39.2% vs. 38% for Japan. The OECD average in 2012 was 25%.
But those are statutory rates. They don’t take into account tax offsets, the present value of depreciations, and other deductions that narrow the base and distort decision making. When you look at effective tax rates, the picture looks just as bad for America, though. Through 2010, the OECD average was about 21%, much lower than the US effective corporate tax rate of 29%. The US used to be on the lower end of corporate taxation, but not anymore.
What makes for a competitive, pro-market, pro-growth corporate tax code? Here’s economist Joel Slemrod in the new AEI book Rethinking Competitiveness, edited by Kevin Hassett:
Most economists, and I, believe the tax system most conducive to prosperity is a low-rate, broad-base tax system, one in most cases that minimizes the role of the tax system in private decision making and consequently allows market forces to determine the allocation of resources. … Unfortunately, the U.S. system of taxing business income fails to meet any of these standards. … The current U.S. system of taxing corporations distorts economic behavior on a number of margins and thus reduces national income, a reasonable but imperfect measure of prosperity.
One possible set of reforms, which I think are in line with the Slemrod criteria, has been proposed by AEI’s Alan Viard. He has proposed a business cash-flow tax as part of an X-tax plan. Some of its aspects:
1. All investment, including equipment, structures, land, and inventories, would be expensed.
2. Firms would deduct purchases from other firms, wages, fringe benefits, and pension contributions.
3. Sole proprietors would treat their business cash flow as wages, which would be taxed on household returns at the graduated rates.
4. Business tax preferences, except a reformed and permanent research tax credit, would be abolished. (The research tax credit would be a flat, non‐incremental credit, with qualified research limited to research undertaken to obtain knowledge that exceeds, expands, or refines the common knowledge of skilled professionals in the relevant field.)