To some, General Electric became the poster child for a corrupt tax system and corporate greed when it was revealed the company paid no federal taxes in 2010. Some Americans accept it as conventional wisdom that corporations generally use loopholes to avoid taxes, and that Washington ought to hit them harder to help the nation's bottom line.
A special report by the nonpartisan Tax Foundation in Washington lays all this nonsense to rest. It may be fair to argue for the elimination of corporate loopholes but, on average, U.S. corporations pay more taxes than those just about anywhere else.
The report synthesizes several credible academic studies on the issue in recent years and reaches an overwhelming conclusion. The tax rate on corporations in the United States is the second highest in the developed world, only slightly behind Japan. But 13 separate studies on all those loopholes corporate lawyers have perfected found the nation's effective tax rate — or, in other words, the rate corporations actually pay — ranks among the five highest in the world.
Corporations headquartered in the United States pay an effective rate of about 27 percent, while those headquartered in other developed nations pay an average of 20 percent. In addition, the report found that 30 of the 34 nations that are part of the Organization for Economic Cooperation and Development have lowered their corporate rates in an effort either to retain business or to attract it.
Viewed in light of the recent dismal economic news in the United States — news that ranges from a structural deficit that contributed to a reduction in the nation's credit rating to an August report that found a stagnant jobs market — the picture this report paints becomes clear. The United States needs to lower its corporate tax rate, and it needs to lower it to a level that at least is competitive with other developed nations.
The United States cannot do anything directly to force China or other countries to increase wages to a level on par with the U.S. standard of living. It should not allow child labor or lax quality control standards in order to compete with developing nations that sometimes lure corporations. It can, however, adopt a tax rate that doesn't act as a barrier to competition.
While President Obama touts his expensive, tax-laden plan to spur new jobs through, among other things, bailouts to state governments and credits to companies that hire, Congress would better serve the American people by making a reduction in corporate taxes an immediate priority.
Already, plenty of bipartisan support exists for such a thing. President Obama talked about it in his last State of the Union address. If the administration and Congress decide to limit corporate tax loopholes at the same time, that would be good, as well.
It seems silly, however, to expect to foster a competitive business environment in a global economy with rates among the highest in the world.