by Mitch Kokai
Senior Political Analyst, John Locke Foundation
“The current system has flaws that don’t make sense under any perspective,” says Alan Viard, a resident scholar at the conservative-leaning American Enterprise Institute. A basic rule of taxation is that a low tax rate on a broad base of income is less distorting—i.e., more efficient—than a high tax rate on a small base. The U.S. breaks that rule. It has one of the world’s highest corporate income tax rates, 35 percent, but it raises less money from it as a share of gross domestic product than the average of the 35 mostly rich countries in the Organization for Economic Cooperation and Development. U.S. businesses have found ways to avoid taxes by shifting operations or headquarters abroad or by organizing into entities that aren’t subject to the corporate levy.
The U.S. is also one of the few countries that attempt to tax domestic companies on their worldwide profits. It taxes profits made overseas only when they’re brought home, which induces companies to keep more than $2 trillion stashed abroad. The House GOP plan doesn’t just cut the rate on the corporate income tax—which would leave the flawed structure in place—it repeals it outright. Companies would be allowed to deduct the full cost of new equipment, software, or structures in the year they were purchased, rather than bit by bit as they depreciate. Because it taxes based on receipts and outlays as they occur, economists term it a cash-flow tax. The Better Way plan ends preferential tax treatment for interest payments, an old but unwise policy that induces companies to take on debt. And it brings the U.S. in line with the rest of the world by applying the tax territorially. Imports are taxed; exports aren’t. That’s fair to trading partners: Imports face about the same tax treatment as domestic products. And while exports aren’t taxed by the U.S., they can be—and probably are—taxed by the receiving country. (One snag: While economists judge the tax to be equitable, lawyers at the World Trade Organization may feel differently.)
Meanwhile, the chart demonstrates how the corporate income tax picture has changed since Bill Clinton left the White House 16 years ago.