Recommendations > Recommendation Detail
The Challenge: Our Current System of Corporate Taxation Hurts Both Business Competitiveness and American Workers
As of April 1, when Japan reduces its rate, the U.S. will have the highest statutory corporate income tax rate among the 34 developed countries in the OECD. Yet the corporate tax raises relatively little revenue, because the U.S. code has numerous special deductions, credits, exclusions, and loopholes. At the same time, our worldwide system of corporate taxation discourages companies from investing their foreign earnings in the U.S. The result is an outdated and extremely inefficient system that creates economic distortions and puts U.S. businesses and workers at a disadvantage.
- The top U.S. corporate income tax rate of 35% is nearly ten percentage points higher than the average among our competitors in the OECD.
- About half of business income is now accrued through “pass-through” entities like S corporations and partnerships, which are excluded from the corporate tax.
- Due to its complexity and the incentives for tax avoidance, the U.S. corporate tax system results in high administrative and compliance costs of over $40 billion a year—money that businesses could be using to invest and hire.
- A growing body of research also shows that in a world of mobile capital, workers bear a rising share of the burden of the corporate income tax in the form of reduced employment opportunities and lower wages.
Jobs Council Recommendation: Create a Simpler, More Competitive Tax System
There is a growing bipartisan consensus that the country needs comprehensive reform of the corporate income tax. The Council agrees, and supports measures to create a simpler, more efficient tax system that levels the playing field for businesses and makes the U.S. more competitive internationally.
Lower the Tax Rate and Broaden the Base. The Council recommends moving from a corporate tax system with a high rate and a narrow tax base to one with a broader base and a lower tax rate. This would not only enhance economic efficiency but encourage more investment in the U.S. by foreign and domestic companies, boosting economic growth as well as employment.
In a global economy in which capital can move easily across borders, differences in corporate tax rates have a growing influence on where multinational companies decide to invest. Yet while most of our competition has reduced their rates significantly over the past three decades, corporate income taxes in the U.S. have changed very little. Broadening the tax base would simplify the tax code and enable the U.S. to lower the corporate income tax rate to internationally-competitive levels.
A Territorial System of Corporate Taxation. Many Council members agree that the U.S. should shift to a territorial system of taxation in order to make America more competitive in global markets. While most other developed nations have adopted territorial systems that exempt most or all foreign income from taxes when they are repatriated, the U.S. subjects all worldwide earnings to the corporate income tax when they are brought home to the U.S. This approach actually encourages U.S. companies to keep their earnings abroad rather than investing them here at home. Adopting a territorial tax system would bring us in line with our trading partners and would eliminate the so-called “lock-out” effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of American companies in the U.S.
Some members of the Council disagree with this point of view. They believe that, if the U.S. adopts a territorial system of taxation, it is imperative that it is designed in a way that prevents U.S. firms from exploiting U.S. markets while avoiding U.S. tax. They believe the U.S. corporate tax system must be designed to prevent such behavior.
Create a Process with Teeth to Forge a Consensus on Tax Reform. Given the stakes for U.S. competitiveness and fiscal responsibility, the Council urges Congress and the administration to begin work on tax reform immediately. Leadership of both parties in the House and the Senate should make a public commitment to getting reform done and they should begin the process now.