by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Among the many reasons every presidential candidate should make tax reform a key issue is that the tax code is biased against investment—and that hurts the economy. Curtis Dubay and David Burton write:
The way the tax code treats business is the biggest inhibitor of growth in the tax code today. The U.S. has the highest corporate tax rate of any country in the Organization for Economic Co-operation and Development (OECD)—the 34 most industrialized countries in the world. The federal rate is 35 percent and states add over 4 percentage points on average for a combined rate of 39.1 percent. However, rates in some states are much higher than the average. Businesses in those states face a combined rate well in excess of 40 percent. For instance, the rate in California is 8.84 percent, so businesses there pay a total rate of almost 44 percent. High rates make it unattractive for businesses, both foreign and domestic, to locate new investment in the U.S.
Further inhibiting investment is the fact that the U.S. is effectively the only developed nation that taxes its businesses on the income they earn in foreign countries. This taxation creates another disincentive for U.S. businesses to invest, which further suppresses wage growth and job creation for American workers. The worldwide system also makes it attractive for foreign firms to buy U.S. firms, or for U.S. firms to merge with foreign corporations and move the new company’s headquarters abroad—as was the case in the spate of inversions in 2014. In either case, the new business moves its headquarters and legal domicile abroad to avoid the impact of U.S. worldwide taxation.