The U.S. Needs a More Competitive Corporate Tax System

The United States holds the unenviable position of having a higher statutory corporate tax rate than any of our major trading partners—and all OECD countries. Among 135 nations, the U.S. rate is exceeded only by the United Arab Emirates. While skeptics point to the array of provisions that allow a reduction below the topline statutory rate, many ignore the additional burden created by state and local taxes. It is abundantly clear that, when compared to the rest of the developed world, the U.S. rate is out of step at best and uncompetitive at worst. The current global tax system in the United States puts manufacturing firms at a disadvantage inside and outside foreign countries. If the United States converted to a territorial system as part of comprehensive tax reform, it would remove the current barrier to corporate repatriations (transfers in foreign subsidiaries’ profits to U.S. parent companies), promoting a marked rise in domestic investment.

The profits of C corporations (entities taxed separately from their shareholders) are taxed once at the corporate level at the corporate income tax rate and again when the after-tax profit is distributed back to shareholders at personal income tax rates. The already high corporate tax rate, coupled with double taxation of dividends and capital gains, reduces economic efficiency by discouraging capital formation and broader economic growth.

The bottom line is that the U.S. corporate tax code should change from a worldwide to a territorial system, and statutory rates should be reduced to competitive norms. When business decision making is based on profit maximization and growth goals rather than tax strategies, the result is enhanced economic performance of the U.S. economy.

Kristin Graybill