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Trivia Tidbit Of The Day: Part 222 -- U.S. Losing Its Low Tax Comparative Advantage.

The United States Needs To Lower Its Corporate Tax Rate-

Comparative advantage.

You may have heard of it.

Essentially, countries (or states, or cities...) compete with one another in the increasingly interconnected global marketplace, and those with advantageous business conditions relative to other countries tend to rise to the top. If goods or services can be produced more efficiently (cheaper, faster, better) in Zanbogo than in New Shariza, companies will choose to locate in Zanbogo. Zanbogo, all other things being equal, would have a comparative advantage over New Shariza.

It's not rocket science.

Let's think, then, about America's comparative advantages over other countries. Traditionally, the U.S. has had lower taxes, a highly skilled/educated workforce, proximity to our own thriving consumer market, an abundance of natural resources, a strong rule of law, less governmental corruption, and a variety of other advantages over other countries. On the other hand, America is a rampantly litigious society, with relatively strict environmental and labor regulations. These factors drive up the cost of doing business in the U.S.A.

But, as recently as a few years ago, relatively low taxes have been a defining trait of the American economy. Oddly enough, although President Bush has been fiercely committed to tax relief during his administration, the U.S. has slipped a bit in its corporate tax rate comparative advantage.

Other countries are catching on to the fact that globalization means economies do not exist in separate, sterile lab beakers. Countries must compete with each other, policy-wise, in order to lure (and/or keep) dynamic, job-creating, wealth-generating companies.

From 2000 to 2005, corporate tax rates around the world fell significantly, while remaining nearly unchanged in the U.S. (.pdf):

After cutting 12 percentage points off its corporate tax rate in 1986, the U.S. rate stayed below the world average until 1994. That was the first effective year of the tax hike President Clinton signed into law a year after his election, the Omnibus Budget Reconciliation Act of 1993, which added a new top rate of 35 percent. Since then, the top federal statutory U.S. rate has remained at 35 percent. Combined with an average state corporate income tax rate of 6.6 percent, which is deductible from federal taxable income, the overall rate of tax on corporate income is 39.3 percent in the U.S. Among our major trading partners, tax competition has driven the average rate down to 29.2 percent....

The clear trend among OECD countries is a move to cut corporate income tax rates to attract new investment. In fact, not one country
raised its corporate tax rate between 2000 and 2005. OECD countries have, on average, reduced their corporate tax rates by 13 percent
in this five-year period. Most notably, Germany, with the third highest corporate tax rate in the OECD, slashed its federal rate by 25.2 percent in five years. Other leaders in reducing corporate income tax rates include Ireland (a 47.9 percent rate reduction) and Iceland (40 percent).

To be sure, the U.S. has other advantages (even tax ones) over other countries, but do we really want to get left behind by the global corporate tax cuttimng phenomenon? Does the U.S. actually want to become a high tax haven?

Source:
The Tax Foundation (.pdf).

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Posted by Will Franklin · 21 November 2005 05:38 PM

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