As of April 1, when a change in Japan’s tax law goes into effect, the United States will have the highest statutory corporate tax rate of any industrialized nation. It is bitterly appropriate that this happens to be the day we mock foolishness.
There is a race underway for global competitive innovation advantage. More and more nations are beginning to understand their tax codes are among the most valuable tools they have to win that race. They understand that higher corporate taxes reduce investments, new business start-ups, and inward foreign direct investment. In the last 30 years, corporate tax rates for OECD nations and China have declined from nearly 50 percent to levels less than half that. Even formerly high-tax countries such as Sweden have reduced their corporate taxes dramatically. Unfortunately, the United States is not following suit.
The good news is that the Obama Administration and many in Congress seem increasingly aware of this new global reality and have begun to look into meaningful corporate tax reform. The bad news is that almost all proposals for corporate tax reform are premised on revenue neutrality. The problem with revenue neutrality is that it is likely to neutralize potential benefits of reform. Simply lowering the statutory corporate rate, but then cutting deductions and credits to pay for it, will do nothing to address the fact that the U.S. also has a very high effective corporate tax rate relative to our competitors. Moreover, cutting key incentives like the domestic production credit, the R&D credit, and accelerated depreciation would reduce the incentive for companies to make the investments needed to restore U.S. competitiveness.
If anything, we should emulate our competitors and reduce statutory rates but then make the effective rate even lower with targeted incentives aimed at spurring innovation and competitiveness. For example, we should expand the generosity of our R&D credit to be more on par with that of other countries. And we should implement a “patent box,” aimed at spurring and commercializing innovation as a number of nations have done in the last few years.
If we want to quicken the pace and get back in the lead in the global innovation race, we should shed the distinction of having the highest statutory corporate tax rate and reduce the effective tax burden on firms investing in the building blocks of innovation and competing in global markets. Instead, we are dragging our feet on corporate tax reform, getting bogged down with rhetoric about corporate welfare from the left and a focus on lowering individual tax rates from the right. What’s worse, the options we are looking at could have the perverse effect of making us even less globally competitive.
Congratulations Japan – and other global competitors. You got us. On this April Fool’s Day, the joke’s on us.