Assessing U.S. Corporate Tax Reform in an Age of Global Competition

Over the past two decades other nations have steadily lowered their corporate tax rates to the point where the United States now has the highest statutory rate in the world. But we also have a very high effective rate relative to our competitors. Moreover, unlike most nations, the United States taxes companies on world-wide income. To top it off, we ranks 27th in the generosity of our research and development tax credit. This report explains the basic issues involved in tax reform and documents how the United States has fallen behind in the global competition to attract and retain business activity. It summarizes the growing literature on the link between tax rates and investment and economic growth as well as the effectiveness of the R&D tax credit in incentivizing additional private research with large social spill-over benefits. Corporate tax reform is one of the most important things Congress can do to grow the economy.

The report makes the following points and recommendations:

• The United States faces intense competitive pressure in keeping and attracting corporate investment and the jobs that come with it. This new competition limits the degrees of freedom policymakers have in crafting corporate tax policy.
  
• Both U.S. statutory and effective corporate tax rates are significantly higher than those of most other countries.
  
• The current policy of taxing the worldwide profits of U.S. companies puts them at a disadvantage when competing for world markets.
  
• Although lowering the statutory rate is important, it is even more important to lower the effective rate. This is best done by expanding the few tax provisions, such as the R&D tax credit and accelerated depreciation, which clearly cause companies to expand investment, while also lowering the statutory rates.
  
• Congress can pay for a reduction in the effective corporate tax by raising taxes on the individual side, through means such as a carbon tax, a value added tax, and/or taxing dividends, carried interest, and capital gains as normal income.