RECESS WATCH: Corporate Tax Reform

The end of summer is upon us and so is the end of the month-long recess for lawmakers as they will return in full this coming Monday, September 9^th. There’s no doubt there is plenty of work to do and the work left undone that awaits them covers a broad range of issues. In this final edition of TPA’s ‘Recess Watch’ corporate tax reform is the focus and this is an issue that Taxpayers Protection Alliance has been on top of for some time now and recent developments have shown that there is a desire on both sides of the aisle and in the White House to get something done for comprehensive tax reform.

The reason it would seem that there is such broad agreement on corporate tax reform is the fact that the United States has the highest corporate tax rate in the world (read previous blog postings here and here).  Having the highest corporate tax rate is unwanted distinction, and it is no cause for celebration. On April 1, 2012, Japan lowered its corporate tax rate to 36.8 percent from 39.8 percent; this left the United States with the highest effective rate among developed countries: 39.2 percent. This should give lawmakers pause knowing that they are making it more difficult for businesses to operate and earn a profit when they are burdening them with effectively the highest corporate tax rate in the world.

The proof is really depressing when you see that not only are businesses weary to do business in America due to the staggering corporate tax rate, but those that are here aren’t so eager to expand within the United States knowing they will be served up a slew of statutory taxes that would essentially take a large portion of the hard-earned profits and give it to Washington, a town with barely anyone who knows how to spend and save responsibly. In a study earlier this year from Ernst & Young commissioned by the RATE coalition, their findings revealed exactly why the economy is in dire need of corporate tax reform:

• The average statutory foreign corporate tax rate of the 19 countries analyzed will have fallen nearly 35 percent between 1988 and 2015, when all currently scheduled changes will be fully in effect.
• U.S. GDP is estimated to be between 1.2 percent and 2.0 percent smaller in 2013 because of the high U.S. corporate tax rate relative to the reductions in corporate tax rates enacted abroad beginning in 1988.
• In the long run, the U.S. economy, as measured by GDP, is estimated to be smaller by between 1.5 percent and 2.6 percent if the current differences in corporate tax rates remain.
• In today’s $15.7 trillion economy, the long run impact on the U.S. economy is equivalent to a reduction in U.S. GDP of about $235 billion to $345 billion each year.
• In 2013 real wages will be about 0.1 percent to 0.3 percent lower than they would have been otherwise.
• In the long run, real wages would be about 1.0 percent to 1.2 percent lower than they would have been otherwise.

Earlier this year, TPA spearheaded a coalition letter signed by 60 Plus Association, Americans for Job Security, Americans for Tax Reform, Center for Individual Freedom, Citizens Against Government Waste, Competitive Enterprise Institute, Less Government, Let Freedom Ring, National Taxpayers Union, R Street Institute, and Small Business & Entrepreneurship Council expressing support and advocating strongly for comprehensive tax reform, including the corporate rate:

“Additionally, while the need for simplification is clear, any reform to the tax code must also be accompanied by an overall reduction in statutory rates. At the start of this year, as part of the fiscal cliff agreement, tax rates on many American small businesses jumped to an incredible 39.6 percent and, on April 1, the U.S. celebrated a full year of having the world’s highest corporate income tax at 35 percent (nearly 40 percent when state and local tax rates are included). As America has stood still on reforming our tax code, other nations have aggressively worked to reform their business tax codes resulting in an average rate of just 25 percent among OECD nations – a full 10 percentage points lower than the current U.S. corporate rate.”

Senator Max Baucus (D-Mont.) and Rep. Dave Camp (R-Mich.), chairmen of the tax-writing committees in the Senate and House, have been working in a bi-partisan manner to address these tax issues.  Earlier this summer they hit the road to find out what Americans thought about the tax code and encouraged member of the House and Senate to submit their ideas for a new tax code and their tour will continue with a stop in Nashville, TN next week. The only hiccup was the fact that members of the House and Senate wanted their ideas to remain anonymous for 50 years. The direct response to this was clear: Transparency must be the standard, and Taxpayers for Commonsense spearhead a letter urging any member involved in tax reform to “make all correspondence with the committee relating to this tax reform public in real time.” The work being done by the tax writing Chairs of the Senate and House, Senator Max Baucus (D-Mont.) and Rep. Dave Camp (R-Mich.) does seem genuine and there is hope that comprehensive tax reform with a specific focus on the corporate tax could be something that will see a great deal of attention over the next few months. The consequences of Congress putting this issue aside once again are becoming increasingly worrisome due to the adverse impact on the economy that the high corporate tax rate is having.  A high corporate tax rate not only hurts from a domestic standpoint, but it also hurts foreign investment. Foreign countries are deterred from investing in the United States while at the same time encouraging U.S. companies to relocate. From 2000 to 2011, the U.S. lost a net of 46 Fortune Global 500 company headquarters to other, lower-tax countries in Europe and Asia. The loss of these headquarters not only creates a loss of significant, often higher-paying jobs, it also dismantles what is usually the centerpiece of a community.

Though the ‘Recess Watch’ is over, the need to call attention to this, and the many other issues TPA has highlighted over the last few weeks remains in tact. When lawmakers return next week from their vacation, it is important that thy hear the voice of Americans all over the nation who are sick of seeing the greatest country on earth continue to struggle as solutions are put aside in favor of petty arguments and political grandstanding. It is time to reform the tax code, and the best place to start is with the corporate tax!