A key theme of today’s Senate Finance Committee hearing was competitiveness. As Chairman Orrin Hatch (R-UT) noted, “while the U.S. corporate tax rate has remained unchanged for decades, the trend among our foreign competitors has been to lower corporate rates, making American businesses increasingly less competitive.”
Our outdated tax code is a drag on the economy and stands in the way of job creation.
One study by the National Association of Manufacturers (NAM) found that pro-growth tax policy changes would spur an immediate hiring boom, followed by the creation of roughly 500,000 jobs every year, adding more than 6.5 million more jobs over a decade.
Reducing the tax rate on business income is a key component of pro-growth reform.
Currently, manufacturers organized as corporations face a top statutory federal income tax rate of 35 percent. That far exceeds the average statutory rate imposed in other advanced economies. Among the other 34 advanced economies that comprise the Organisation for Economic Co-operation and Development, the average maximum corporate income tax rate is 21.97 percent.
Even if measured by the standard effective rates, American corporations face one of the highest tax burdens in the developed world. As Chairman Hatch noted, “the average effective tax rate of U.S. corporations is the fourth-highest among G20 countries.”
— Nat Assoc of Mfg (@ShopFloorNAM) September 6, 2017
But businesses organized as pass-throughs face even higher top marginal rates. A report by the Tax Foundation found that “combined, the top marginal income tax rates faced by pass-through businesses can exceed 50 percent.” The same report noted that the average top marginal tax rate for pass-throughs in the United States exceeds 44 percent.
— Nat Assoc of Mfg (@ShopFloorNAM) September 11, 2017
While many small businesses are organized as pass-throughs, clearly not all pay taxes at the highest marginal rate. But America is an aspirational society. Entrepreneurs often risk financial ruin when starting their businesses. What message do we send to entrepreneurs if we reward their success by taking half of their income?
We have a once-in-a-generation opportunity to reform our tax code. The NAM has advocated a corporate income tax rate of 15 percent, with comparably lower rates for pass-throughs. Such a bold policy would ensure that America remains the best place in the world to start, operate and grow a business for decades to come.
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