High Corporate Tax Rates Do Not Bode Well For An Economic Recovery

May has been a big month for one American business, Facebook.  Instead of celebrating this success story, some policy makers in Washington D.C. want to penalize wise tax planning. According to a May 17, 2012 story in the Los Angeles Times, “Two senators on Thursday denounced Facebook Inc. co-founder Eduardo Saverin as a tax dodger for renouncing his U.S. citizenship ahead of the company’s initial public offering and introduced legislation to punish him and others who leave the country to duck big tax bills. Among the penalties would be a ban on reentering the United States for anyone that the Internal Revenue Service determined renounced citizenship to avoid paying taxes.”   This policy clearly represents how misguided the United States government is and how it is failing to compete with other countries in attracting and retaining businesses on our shores with an attractive corporate tax rate.   

The United States prides itself as being a country that rewards innovation.  Take for example our robust infrastructure to protect intellectual property.  The United States government has a whole agency, United States Patent and Trademark Office  whose nearly 10,000 employees are  tasked with issuing patents and  trademark registration to inventors and businesses for their inventions,  for the sole purpose of intellectual property identification.  While this infrastructure is beneficial to allow business and inventors to capitalize on their ideas, they are penalized on the other end when they go to sell their ideas with a repressive corporate tax rate.  On April 1, 2012, the United States was bestowed the dishonor of having the highest corporate tax rate of any country in the world.  This high rate of taxation can and will have extremely negative consequences on the national economy at a time when the country can least afford it.  According to a new white paper  by O’Melveny and Myers’s Jonathan Sallet and Robert Rizzi, innovation and economic growth are stifled by a high corporate tax rate.

Some of the key findings of their paper include:

• The United States has continued to adhere to the policy of high corporate tax rates combined with targeted narrow tax breaks. This approach to tax policy creates substantial uncertainty regarding future policies and undermines job creation.
• Firms facing a burdensome corporate tax rate like those in the United States are at a competitive disadvantage against their international counterparts and could potentially “fall behind in innovation and productive capacity.”
• A lower federal corporate income tax rate will lead to additional capital investment and greater productivity. This boost in earnings and capital will serve as a direct catalyst for job creation and growth.
• Lower corporate tax rates equal a lower cost of capital while higher rates raise the cost of capital to firms. Studies have shown that companies facing high corporate tax rates will reduce a firm’s capital investment.

Congress needs to act fast.  According to an April 4, 2012 op-edin Reuters by Elaine Kamarck and James P. Pinkerton, “The U.S. in the dubious position of being number one in anti-competitiveness with a current combined rate of 39.2 percent. . . . combined corporate tax rate, and federal rate at 35 percent, leaves us in a weaker position relative to other leading economies.”  Policy makers are working on a solution, but not fast enough.  In February, Treasury Secretary Timothy Geithner proposed a plan to reduce the corporate tax rate to 28 percent and House Republicans have proposed a rate of 25 percent.   Unfortunately, policy makers in Washington are not the only ones paying attention as Kamarck and Pinkerton point out our competitors are also taking notice, “Over the last 20 years, America’s competitors have lowered their top corporate rates to levels as low as 12.5 percent and 8.5 percent in the cases of Ireland and Switzerland, while the U.S. has not.”

Now is the time for policy makers to get serious and lower the corporate tax rate.  Facebook’s Eduardo Saverin, should be not be penalized, but rewarded by policy makers in Washington by pointing out a clear flaw in our national policy when it comes to corporate taxation.  Furthermore, taxpayers cannot and should not be forced to continue to wait for a robust economic recovery.  The U.S. cannot afford to lose any tools to attract business to its shores and having a high corporate tax rate is not a tool, but a vice.