As we've learned, when it comes to fixing the economy there are no silver bullets. And while each party has its own ideas there are few ideas that both parties can agree on. While the latest unemployment numbers suggest we are making some progress, at 8.6 percent unemployment is still at an historic high. In the meantime, as President Obama has argued, income equality is growing, families continue to struggle and the political system is stuck in gridlock. The longer it takes for this recovery to get going in earnest the harder it will be to overcome these disparities.
But there is one idea kicking around that has a surprising amount of bi-partisan support -- reforming the corporate tax rate. The outline of this reform is the same one we've seen since the last major overhaul of the tax system 25 years ago -- cut rates and eliminate tax expenditures.
But a lot of Americans wonder why we should be cutting corporate tax rates at all? In recent months we've been faced with a barrage of news stories about how some large corporations don't pay taxes, other large corporations pay more to Washington lobbyists than they do to Uncle Sam and still others move their jobs out of the country to avoid taxes. As The Center for Budget and Policy Priorities points out, while America's corporate tax rate at 35 percent is almost the highest in the world (with the sole exception of Japan) corporate revenue as a percentage of GDP has been dropping since the 1950s.
What accounts for these anomalies? We're stuck with an outdated corporate tax code that isn't helping America grow. Earlier this fall, Senator Patty Murray (D-WA) acknowledged the problem in Bloomberg. "Instead of making and improving their widgets or hiring new people," she said, businesses "spend too much time and effort devising business strategies aimed simply at tax avoidance." Instead of a transparent corporate tax that is job friendly, we have a multi-headed hybrid of credits, deductions and subsidies to go along with an overall rate that limits investment and job creation. As the Center for Budget and Policy Priorities study points out, the current corporate tax code contains a bias towards debt financing, a bias towards overseas investments and a plethora of special preferences. This "...encourages businesses to choose among investments in substantial part based on their tax benefits, instead of making those decisions based entirely on investments' real economic value."
So why not just get rid of the loopholes but keep the tax rate at its current 35 percent? That would hurt growth and exacerbate the problems we have competing globally. Not only have the OECD countries reduced their corporate tax rates over the years to an average of 25 percent -- members of the OECD are starting in on yet another round of cuts. Canada and Great Britain, two of our closest trading partners, are moving in this direction. America has the second highest corporate tax rate of any of the developed nations. We can't sit by while our competition is changing. A 2008 report by economists at the OECD found that the corporate income tax is the most harmful tax for long-term economic growth. A 2010 World Bank study demonstrated that corporate tax rates have a "large and significant adverse" effect on investment. And investment and economic growth equals jobs.
Wage data from 65 countries over 25 years shows that every one percent increase in corporate tax rates leads to a 0.5 to 0.6 percent decrease in wages.
Thus overall reform of the corporate tax code has to close the "loopholes" and remove the distortions while simultaneously lowering the rate. Even in this highly polarized time a bipartisan consensus is developing that we should reverse course on the corporate tax rate front -- even President Obama and House Speaker Boehner agree. As a co-Chairman of the RATE Coalition (Reforming America's Taxes Equitably), I am working with like-minded individuals and businesses (that employ and serve millions of Americans) whose mission is to reform America's outdated corporate income tax policies.
We believe that a lower corporate tax rate would better allow U.S. businesses to compete in today's global marketplace and restore vitality to our economy so economic growth finds all American households. The time to act is now.
Dr. Elaine Kamarck, former advisor to President Clinton and Vice President Gore, is Co-Chairman of the RATE (Reforming America's Taxes Equitably) Coalition.
For more information about the RATE Coalition, visit www.RATEcoalition.com.
RATE member companies and organizations currently include: AT&T, Altria Client Services Inc., Association of American Railroads, Boeing, Capital One, Cox Enterprises, CVS Caremark, FedEx, Ford, General Dynamics, Home Depot, Intel, Lockheed Martin, Macy's, National Retail Federation, Nike, Raytheon, Texas Instruments, Time Warner Cable, T-Mobile, UPS, Verizon, Viacom and Walt Disney.