Corporate tax reform is an idea that is starting to get some attention in Washington. This is one area that could be greatly improved by our legislators. The United States currently has one of the highest corporate tax rates in the world. Few will dispute that lowering our corporate tax rate will improve our competitiveness in the global marketplace. But there is a huge debate about how low the tax rate should go and which, if any, of the myriad of current tax incentives should be eliminated or changed.
The current corporate tax rate in America is 35%. Because of loopholes, deductions, tax credits and other incentives few corporations actually pay this rate. For instance, the manufacturing sector gets tax breaks if they manufacture on U.S. soil, invest in equipment, or engage in R & D activities. So the effective tax rate that the total manufacturing sector pays is actually about 17%, not the great 35%.
The Obama administration is proposing that we eliminate all of the tax breaks and lower the corporate tax rate to 25%. So the effective tax rate for manufacturers would go from 17% to 25%. So Obama is more interested in raising revenues for the federal government than he is in making American manufacturers more competitive. Clearly, this is not the way to go.
I wholeheartedly endorse the idea of eliminating loopholes, deductions, credits, etc. Get rid of all of them. They distort the market, and thereby end up doing more harm than good in the long run. But once all of the incentives are removed, the corporate tax rate should be lowered to 20%.
I did not pick this number at random. It turns out, that 20% is the best the government can ever hope for no matter what. History shows that government revenues over the past few decades always fall in the range of 17% to 19%. It does not matter what the prevailing tax rate is at the time, and it does not matter how much the government spends. Total federal revenues never rise above 20% of GDP. When the rates are higher than 20%, corporations find ways not to pay. The most popular way to avoid paying more than this is to simply move your operation overseas.
So if 20% is the best they can do, let's just make this the rate and be done with it. The money that manufacturers currently spend hiring tax consultants, and tax lawyers, and accountants could be spent on workers or equipment that actually produce competitively priced goods and services. I believe that money would be repatriated from overseas, and compliance rates would improve significantly. The net result would be more revenues for the government. It would also make us a more competitive place for foreign companies to invest.
I can think of no downside. Lowering rates to the optimal level of 20% is good for everyone, even Democrats and Republicans. So why are we waiting?