Excellent discussion of U.S. corporate taxes by Veronique de Rugy Wednesday at NRO’s The Corner, “How Punishing Is the Corporate Income Tax?” The Mercatus Center research fellow addresses the issue often raised by critics of U.S. businesses, that yes, the U.S. corporate tax rate is high, but corporations take advantage of exemptions and deductions. It’s a legitimate issue to raise but should not be considered independently of the U.S.’s reliance on a worldwide tax system.

As it turns out, the U.S. not only imposes high rates, it also taxes corporations on a worldwide basis: Profits made by an American-owned computer plant are subject to U.S. taxes whether the plant is located in Texas or Ireland. Most major countries don’t tax foreign business income. In fact, about half of OECD nations have “territorial” systems that tax firms only on their domestic income.

De Rugy then raises an issue we were unfamiliar with, that is, studies that show a correlation between higher corporate tax rates and lower wages.

In recent years, several much-discussed studies have found that it is likely that much of the burden of the tax is borne not by capital but by domestic labor, in the form of lower wages. For instance, this December 2010 paper by economists Aparna Mathur and Kevin Hassett shows the link between corporate tax rates and the average manufacturing wage (in U.S. dollars) for 65 countries over a period spanning 1981–2005. They find that there is a clear negative link between the two, suggesting that higher corporate tax rates lead to lower worker wages. They test this theory using regressions controlling for a bunch of other factors, and find that a 1 percent increase in the corporate income tax leads to an almost 0.5–0.6 percent decrease in hourly wages.

This is consistent with the results of many recent empirical papers — Arulampalam et al. (2007) , Mihir A. Desai, C. Fritz Foley, and James R. Hines (2007), Felix (2007) — that use real-world data to look at who really pays the corporate income tax. These studies find that between 45 and 70 percent of the cost of the corporate tax is borne by labor rather than shareholders.

Very informative, timely piece.

Martin Feldstein of the American Enterprise Institute, writing in The Wall Street Journal, “Want to Boost the Economy? Lower Corporate Tax Rates“:

President Obama has reached out to the business community with talk of lowering the corporate tax rate and improving the tax treatment of profits earned abroad by American companies. That would certainly be an important improvement in our tax system. Unfortunately, his desire to use the elimination of “loopholes” to avoid any loss of corporate tax revenue means that he cannot possibly go far enough in reducing corporate tax rates.

The U.S. corporate tax rate is 35% at the federal level and 39% when the average state corporate tax is included. The average rate in the other industrial countries of the Organization for Economic Cooperation and Development (OECD) is just 25%. Only Japan has as high a rate.

Eliminating every loophole in the taxation of domestic corporate profits identified by the administration’s own Office of Management and Budget would raise less than $60 billion of extra revenue in 2011, enough to lower the combined federal-state corporate rate to 35%. The U.S rate would still be higher than in every other country but Japan, and a full 10 percentage points higher than the average in other industrial OECD countries.

The full piece is behind a WSJ subscription wall, but AEI will post the column on its website on Feb. 22.

See also Curtis Dubay, Heritage Foundation, “Corporate Tax Reform Should Focus on Rate Reduction”

With the newly populist President Obama expected to address budget deficits at Wednesday’s State of the Union address, Jane Sasseen of BusinessWeek previews the White House’s planned push for tax increases on U.S. employers. From “Taxes: Ready to Rumble“:

The budget deficit, bloated by the costs of President Barack Obama’s stimulus plan and the sharp fall in tax receipts due to the recession, will hit $1.4 trillion in fiscal 2010, for the second year running—more than twice what it was in 2008. If Obama sticks to his pledge to keep the Bush tax cuts for families earning less than $250,000 a year, the move will add a projected $230 billion a year on average to the deficit over the next decade.

That leaves only one viable source for the hundreds of billions in extra tax revenue needed to sponge up all that red ink. With his Jan. 14 proposal to raise up to $117 billion through a levy on the nation’s largest financial institutions, Obama took a stab at increasing corporate taxes. It won’t be the last. “The pressure to raise more from the business sector will only intensify,” says Anne N. Mathias, a tax policy analyst for the Washington Research Group. Few expect the Democrats to push hard for a big corporate tax hike before midterm elections, and the prospects for boosting any taxes just got a lot harder with the Democrats’ stunning loss in Massachusetts. Yet Mathias and others believe the risks of a squeeze on companies will rise sharply by yearend, when Congress and the President will have to extend the Bush tax cuts for the middle class before they expire.

Sasseen provides more detail on the kind of taxes the White House is expected to pursue, provisions that will be included President’s proposed FY2011 budget released in February.

The problem, however: Tax increases are incompatible with U.S. global competitiveness.

See The Tax Foundation’s Fiscal Fact from August 2009, “U.S. Lags while Competitors Accelerate Corporate Income Tax Reform.”

New data from the Organization for Economic Cooperation and Development (OECD) shows that the U.S. corporate tax rate has fallen even further out of step with the rest of the industrialized world as countries such as Canada, the Czech Republic, Korea, and Sweden have cut their corporate rates in 2009, lowering the average statutory corporate tax rate of all OECD nations to 26.5 percent.

With a combined federal and state corporate tax rate of 39.1 percent, the U.S. continues to impose the second-highest overall corporate rate among industrialized countries.

The Arizona Legislature blew past today’s budget deadline, so that gives them more time to reread this from The Wall Street Journal editorial page, “Arizona’s Budget Breakthrough“:

Perhaps states are starting to learn the right fiscal lessons from the red-ink blowouts in high-tax California and New York. Today, the legislature in Arizona will vote on a tax reform designed to entice more employers and high-income taxpayers to the state. Sponsored by Republican Governor Jan Brewer, the plan would cut state property taxes, the corporate tax and personal income taxes, in exchange for a temporary rise in the sales tax.

Most economic studies agree that states have more jobs and higher income growth when they tax consumption rather than savings, investment and business profits. This explains why most of the nine states with no income tax at all—such as Texas, Florida and Tennessee—have been economic high-flyers in recent decades.

Ms. Brewer’s proposal reflects this economic logic. Effective January 1, 2011, her plan would reduce the state’s corporate income tax rate to 4.86% from 6.97%, which would be one of the largest business tax cuts in the nation in recent years. The proposal also cuts all personal income tax rates by 6.6%, thus lowering the top marginal rate to 4.24% from 4.54%. A hated statewide tax on commercial and residential property would also be abolished.

Many of the Californians who fled the collapse of the state’s economy and polity moved to Arizona. Suppose they could continue heading east toward Texas.

Eight months ago, that is.

From Bloomberg, “Rangel Plans Push to Cut Top Corporate Tax Rate to 28 Percent: “(Bloomberg) — New York Representative Charles Rangel said he’s revising his tax overhaul proposal to reduce U.S. corporate tax rates to 28 percent, down from the current rate of 35 percent.”

That’s November 15, 2008. And now, July 15, 2009.

Bloomberg, “House Plans to Tax Millionaires to Fund U.S. Health-Care Plan“: “The surtax on wealthier Americans would be imposed based on adjusted gross income, meaning it would also apply to capital gains and dividends, which are currently taxed at a 15 percent rate. House Ways and Means Committee Chairman Charles Rangel said lawmakers targeted high earners because it ’causes the least amount of pain on the least amount of people.’”

As we know, 60 percent of all small businesses file as individuals, so along with tax increase in capital gains and dividends, businesses would also see a major tax increase.

Impressive serpentine policymaking, though.

James Pethokoukis at Reuters’ “Political Risk” blog explains, “Why Europe wants America to raise taxes” by citing the words of Finland’s prime minister. Post global recession, the prime minister wants a coordinated approach in Europe consistent with the goal of “tax harmonization.”

The overall tax rate will have to rise as well over the longer term. In some areas that can be done without much consultation between the countries. … However, raising such taxes can have detrimental effects on economic activity. This is especially so when a country acts on its own: capital and people can respond by migrating to jurisdictions with lower rates. … Parallel measures would help all of Europe: tax competition risk would be reduced and the public finances of individual countries would improve. Such co-ordinated tax changes could set also an important global example. In particular, it might encourage the US – with lower tax levels in most areas – to do what has to be done to address its spiralling budget deficit.

Competitiveness — The Europeans want the United States to raise taxes in order to be less competitive.

Thankfully, the Europeans have not yet consensused themselves into unanimity on the topic. Noel Sheppard at Newsbusters.org notes recent developments and the lack of media coverage, “Media Mostly Ignore German and Hungarian Tax Cuts.”

No coverage? That’s because they’ve already been harmonized.

A clear, two-minute video explaining how the Obama Administration’s plans to rework corporate tax deferral rules will make U.S. businesses less competitive overseas and hurt jobs creation here in the United States.

From the Tax Foundation.

From Dow Jones (subscription), “Union Calls For Foreign Profits Tax To Fund Health Reform“:

WASHINGTON (Dow Jones)–U.S. labor unions are joining a push by the Obama administration to raise taxes on the foreign profits of U.S. multinationals. An AFL-CIO official will urge a Senate committee Tuesday to use the proceeds from Obama’s tax changes – as much as $210 billion – to help fund an overhaul of the U.S. health-care system.

This jobs-killing proposal will be made during a Senate Finance Committee roundtable discussion, “Financing Comprehensive Health Care Reform.” Thirteen witnesses scheduled for the roundness, so the odds are someone will have a better idea than this one.

UPDATE: In related news, “Deficits soar even with rosy Obama budget assumptions”

From Bloomberg, “Rangel Will Overhaul Tax Code ‘Immediately’ After Health Care“:

“Jan. 23 (Bloomberg) — House Ways and Means Committee Chairman Charles Rangel said he will pursue tax reform only after overhauling the health-care system and said “there’s no question” both can be completed by the end of 2010.

“It seems as though the president wants to deal with health care and putting our arms around that is going to be a very, very big job,” Rangel said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing today. “But I would assume immediately following having universal health care we would move into tax reform.”

Rangel continues pushing his admirable goal of reducing the federal corporate tax rate to 28 percent, making it more competitive globally. Good luck, really.

But it’s hard to see how Congress will be inclined to reduce taxes when the federal government is running trillion dollar annual deficits.

The Tax Foundation and CompeteUSA have announced the winners of their video competition designed to inform people about the high U.S. business tax rate and how those taxes harm our competitiveness, wages, and living standards. And the winner is Andrew Patterson of Edmond, Oklahoma:

In “Tax Attack,” Patterson highlights that businesses make everyday decisions based on corporate tax systems and that our high business taxes are making American corporations look internationally for their offices, banking, labor and operations. Patterson, who lives in Edmond, Oklahoma, is a business owner himself, providing film and postproduction services to companies including retailers, business firms, nonprofit organizations and natural gas companies. 

Congrats! A timely competition, indeed.

(Hat tip: John J. Miller)