U.S. Losing Ground from Higher Corporate Tax Rate

The U.S. economy will be between 1.5 and 2.6 percent smaller over the long-term because other nations’ corporate tax rates are considerably more competitive, according to a new study by Ernst & Young and the RATE Coalition, a group lobbying for lower corporate tax rates.

The study measured the effect of changes in corporate income tax systems, including lower corporate income tax rates in other countries, on the U.S. economy. The authors of the study argue that the U.S. increasing inability to compete will result in real wages being 1.0 to 1.2 percent less than they otherwise would have been. In today’s $15.7 trillion economy, the long-term impact on the U.S. economy would be equal to a reduction in U.S. gross domestic product of about $235 billion to $345 billion each year, according to the report. The average statutory foreign corporate tax rate of the 19 countries analyzed in the report will have fallen nearly 35 percent between 1988 and 2015, when all currently scheduled changes will be fully in effect.

The study estimated that U.S. GDP would be between 1.2 percent and 2.0 percent smaller in 2013 because of the high U.S. corporate tax rate relative to the reductions in corporate tax rates enacted abroad beginning in 1988. In the long run, the U.S. economy, as measured by GDP, is estimated to be smaller by between 1.5 percent and 2.6 percent if the current differences in corporate tax rates remain.

“In 1986 President Reagan and congressional leaders passed a tax reform package that drastically reduced America’s corporate tax rate and broadened the tax base, clearing the way for over a decade of strong economic growth,” said James P. Pinkerton, co-chair of the RATE Coalition and a former White House domestic policy adviser to Presidents Ronald Reagan and George H.W. Bush. “The new data in today’s report makes clear that the United States needs to replicate that success or risk being outcompeted by our foreign rivals. Our corporate tax rate has remained at a standstill while our competitors have lowered theirs by 35 percent. We can’t afford to wait any longer.”

The statutory corporate income tax rate is as high as 35 percent, but many corporations lower their effective tax rates by using tax strategies such as tax deferral, transfer pricing and shifting profits to foreign subsidiaries. Congress has been promising action on tax reform this year, but withpartisan divisions among lawmakers, the prospects for a comprehensive tax reform deal remain as uncertain as ever.

The RATE Coalition represents 30 multinational companies and organizations advocating for cororate tax reform. Its members include: AT&T, Altria Client Services, the Association of American Railroads, Boeing, Brown Forman, Capital One, Cox Enterprises, CVS Caremark, FedEx, Ford, GAP Inc., General Dynamics, Home Depot, Intel, Kimberly-Clark, Liberty Media, Lockheed Martin, Macy's, the National Retail Federation, Nike, Northrup Grumman, Raytheon, Reynolds American, Southern Company Time Warner Cable, T-Mobile, UPS, Verizon, Viacom and Walt Disney.

“America has long been the world leader in terms of innovation and work ethic, but we can no longer rely on those virtues alone as other countries outpace us when it comes to corporate competitiveness,” said Elaine Kamarck, co-chair of the RATE Coalition and a former White House adviser to President Bill Clinton and Vice President Al Gore. “In only a few years, our competitors’ average corporate tax rate will be 24 percent lower than ours and the United States economy will be up to 2.2 percent smaller than it would be if America had a competitive corporate tax rate. We need to reform our tax code by putting all tax expenditures on the table and committing ourselves to achieving a competitive corporate tax rate. That’s what worked in 1986 and that is what will work today.”