U.S. could boost competitiveness by lowering taxes
As this is written, the infamous April 15 filing deadline for individual income tax returns is upon us here in the United States. Understandably, it’s a day that many Americans dread.
Of course, the deadline for filing either a return or a request for an extension has already passed for the subject of this column—corporate income taxes.
You can probably guess my position: Corporate income taxes are too high, and the high rates hurt the competitiveness of U.S. manufacturers.
Exactly how high are U.S. corporate taxes? According to figures from The Tax Foundation (Washington DC; www.taxfoundation.org), they’re way out of step with those of most of our major economic competitors. The current top federal corporate income tax rate in the U.S. is 35%, the highest among the 30 countries that are members of the Organisation for Economic Co-operation and Development (OECD)—in other words, our major manufacturing competitors. Only France (34.4%), Belgium (33.99%), Italy and New Zealand (33%) and Spain (32.5%) come close to the U.S. federal corporate tax rate.
But, none of those countries also have state taxes, and piling state taxes on top of federal taxes doesn’t help. Currently, the average combined federal and state corporate tax rate in the U.S. is 39.3%, second highest in the OECD. Only Japan’s combined rate of 39.5% is higher. In 24 U.S. states, the average combined federal and state tax burden exceeds Japan’s. Looking at the combined burden, countries with lower (sometimes far lower) rates include Mexico, Norway and Sweden (all at 28%); Korea (27.5%); the Czech Republic (24%); and Poland and the Slovak Republic (both at 19%). The lowest corporate taxation rates among OECD countries are in Ireland, which at a 12% rate is a full one-third lower than runner-up Iceland (18%).
Some minimal relief—at least in terms of top corporate income tax rates—may be on the way. But other provisions of a new comprehensive tax reform bill make it a net loser for manufacturers, according to the National Association of Manufacturers (NAM; Washington, DC; www.nam.org).
Introduced in October by House Ways and Means Committee Chairman Charles Rangel (D-NY) and somewhat euphemistically dubbed the “Tax Reduction and Reform Act of 2007,” H.R. 3970 proposes lowering the top corporate income tax rate to 30%. That sounds pretty good, but reality is it would only move the U.S. rate from second highest in the OECD to fifth highest.
And, NAM says, there’s more than enough bad news to offset the decrease. The legislation includes a surtax and base-broadening measures that would result in significant tax increases for manufacturers ranging in size from small businesses to multinational corporations. It would also allow the tax cuts enacted from 2001 to 2003 to expire.
According to NAM, the surtax, as high as 4.6%, effectively translates into a $796 billion tax increase on many taxpayers, including several million small businesses. This is part of a trade-off that includes the proposed repeal of the alternative minimum tax (AMT), which would benefit manufacturers who file taxes as S-corporations.
In other hits more or less directly on at least some manufacturers, the bill calls for eliminating the commonly used Last-In-First-Out (LIFO) method of accounting for inventory. NAM says this would result in retroactive and prospective tax increases on LIFO users and could bankrupt some businesses. It would also repeal a tax deduction for income from domestic manufacturing activity that was enacted in 2004, and increase taxes on Research & Development activities.
According to NAM, the result of all the changes would be $78 billion in net tax increases over ten years on U.S. manufacturers—a bad bargain no matter what accounting system you use.