Economic growth in the U.S. continues to suffer for a variety of reasons. For one, our antiquated tax code punishes U.S. companies and inhibits corporate investment here in the United States. How bad is it? The federal corporate tax rate, at 35 percent, when added to the average estimated state rate of 4.1 percent, brings the combined tax rate to 39.1 percent — the highest among developed countries.

If based in Oklahoma or New York, for example, the state rate of 6 percent brings the total to 41 percent. If not swallowed by the government, this money could otherwise be invested in the United States. Instead, it gives foreign companies a competitive advantage and creates an incentive for U.S. companies to establish headquarters abroad in lower taxed countries.

What’s worse is that the United States is one of the only countries in the Organisation for Economic Co-operation and Development (OECD) that has a worldwide tax system and not a territorial tax system. This means profits earned abroad are subject to corporate federal tax when repatriated to the United States.

Negative Incentives

Although a tax credit is typically applied that allows for the amount of tax paid to the foreign government to be subtracted from the amount owed to the United States, this tax system provides yet another incentive to establish corporate headquarters abroad.

The United States has the 32nd most competitive tax system out of the 34 OECD member countries

As a result, it’s easy to understand why U.S. firms do not wish to repatriate an estimated $2.1 trillion in U.S. corporate profits earned abroad — money that could be invested in American research and development, and in plants and equipment, or used to hire and train new employees.

It’s also easy to understand why a U.S. firm would be interested in being acquired by an Irish firm, which is subject to a significantly lower 12.5 percent corporate tax rate, and not subject at all to income generated in other parts of the world. Known as a corporate inversion, this type of activity isn’t theoretical; it’s the basis for many cross-border deals.

In The Spotlight

Troubling Rank

The Tax Foundation, an independent tax policy research organization based in Washington, D.C., says the United States has the 32nd most competitive tax system out of the 34 OECD member countries. According to the Tax Foundation, the U.S. top marginal corporate income tax rate at 39.1 percent is followed by Japan (37 percent), France (34.4 percent), and Portugal (31.5 percent).

The lowest top marginal corporate income tax rate in the OECD is found in Ireland (12.5 percent), and there are four other countries with rates below 20 percent: the Czech Republic (19 percent), Hungary (19 percent), Poland (19 percent), and Slovenia (17 percent). The OECD average is 25.4 percent, the Tax Foundation says.

America’s antiquated corporate tax system gives our competitors a significant edge and leaves fewer dollars for U.S. companies to invest in research and development, or other areas designed to boost productivity. America’s tax policy is not only bad, it continues to hurt our economy.

This article, which appeared in American City Business Journals, is a modified excerpt from John Manzella’s newly released book, Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, competitive strategies and the latest economic trends. He also is chair of the Upstate New York District Export Council and founder of the ManzellaReport.com and Manzella Trade Communications Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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Talkback (3)

  • Guest (Christopher McKee)

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    Great piece, John, as always. The US tax rates are crushing firms and are especially tragic given that there are plenty of territorial alternatives to firms. Zero debate on this one, I bet, in the upcoming election.

  • Guest (Christopher McKee)

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    I would also add, especially for firms that export, the US is adding another burden to overall competitiveness.

  • Guest (RDG)

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    Before the current currency mess, American exports were robust. Corporate profits were at record highs. While there are good points made in this piece, left out of the was the effective tax rate as opposed to the marginal rate.The former is in line with most industrial nations' rates. Also, comparing America with such small countries like Ireland or Slovakia is an exercise in false equivalency. Lose the loopholes and tax subsidies and then the marginal can be dropped to the teens.

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