Corporate Tax System Chasing Away U.S. Business

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Reducing rates would bring capital, labor to the U.S.: New Report from the NCPA

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Permanently eliminating or lowering the U.S. corporate tax rate would reverse the tax calculus and establish the U.S. as a tax haven.

Serious reform is needed to keep businesses from relocating their headquarters abroad in an attempt to avoid the U.S.’ high corporate tax rates, according to a new report by Associate Professor James Angelini of Suffolk University and NCPA Senior Fellow David Tuerck.

“The corporate income tax serves only to obscure and worsen the negative consequences of any tax system for economic growth and tax fairness,” say Tuerck and Angelini. “The resources corporations spend on the tax avoidance industry constitute a deadweight loss to the economy."

The effective corporate tax rate can reach as high as 39 percent, higher than nearly any other country. Many businesses put significant effort into avoiding these high rates, including:

  • Deferring income overseas. In order to avoid paying the high rate on foreign earnings, many businesses simply leave those earnings overseas. It is estimated that U.S. corporations have more than $2 trillion in earnings parked in other countries.
  • Inversions. Many corporations shift their headquarters to countries with lower tax rates than the U.S. Then, only income generated in the United States is subject to our high tax rates.
  • Compensating shareholding employees by paying salaries rather than dividends. Compensation is a deductible expense and can eliminate the corporation’s tax liability.

“Permanently eliminating or lowering the U.S. corporate tax rate would reverse the tax calculus and establish the U.S. as a tax haven,” said NCPA Senior Fellow Pam Villarreal. “Multinational corporations would reverse course and try to shift the sourcing of income into the United States, instead of away from it.”

How Corporations Are Taxed: http://www.ncpa.org/pub/how-corporations-are-taxed

The National Center for Policy Analysis (NCPA) is a nonprofit, nonpartisan public policy research organization, established in 1983. We bring together the best and brightest minds to tackle the country's most difficult public policy problems — in health care, taxes, retirement, education, energy and the environment. Visit our website today for more information.

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Catherine Daniell
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