The U.S. Is Number One
On April 1, Japan cedes the highest corporate tax rate to America.
April 1 is a date that every politician and business executive in America should circle on the calendar. That’s when Japan cuts its corporate tax rate to 36.8% from 39.5%. The United States will then hold the title of highest corporate tax rate, with average combined federal and state profit levies of 39.2%.
Yes, that’s higher than Sweden. Higher than Russia. And China, Mexico, Denmark and even France. Doesn’t it make you want to break out in a chant: U-S-A, U-S-A?
Tokyo’s move is striking because its political class has long behaved as if tax rates don’t matter, and the government is wrestling with the need to finance a typically large budget deficit and an aging population. But in 2010 politicians had a radical idea: Cutting the corporate profits tax would boost economic activity and lead to higher revenues.
The government approved an overall five percentage-point cut, which was delayed by last year’s earthquake and tsunami. But the first installment arrives April 1 and in three years the rate will drop another 2.3 percentage points to 34.5%.
Japan’s neighbors in Asia convinced Tokyo to act by luring investment from what used to be the world’s second-largest economy and is now the third, after the U.S. and China. Korea has cut its top corporate rate to 22%, Taiwan to 17% and Thailand is moving to 20% over the next two years. Hong Kong and Singapore have led the way with longstanding rates of 16.5% and 17%, respectively.
This is part of a world-wide recognition that high corporate taxes create economic distortions. Most obviously they encourage businesses to locate operations in other countries. American liberals argue that most U.S. companies don’t pay the top federal statutory rate of 35% because of various loopholes and credits, but the high rate encourages multinationals to keep their profits overseas to invest there, rather than in the U.S.
High rates also create incentives for tax avoidance that go far beyond making work for creative accountants. For instance, because interest payments are tax-free, corporate taxes encourage debt as opposed to equity financing, making companies more vulnerable to interest-rate shocks and business downturns. A mound of economic evidence also shows that high corporate rates result in lower compensation for workers.
Yet for two decades American politicians have done nothing as the rest of the world has cut corporate taxes, leaving the U.S. rate 10 to 15 percentage points above the international average. Now almost everyone—even President Obama—agrees that it’s time to act. Mr. Obama unveiled a plan last month to chop the federal rate to 28% from 35%, but at the same time it would impose such a high penalty on U.S. firms with overseas operations that business groups rightly say the plan would be worse than doing nothing.
The last four years have seen numerous U.S. economic milestones—four years of trillion-dollar deficits, some $5 trillion in new debt, the loss of America’s AAA credit rating, three years of near-zero interest rates, postwar records for federal spending as a share of the economy, and now the world’s number one corporate tax rate.
Some conservatives say Mr. Obama doesn’t believe in American exceptionalism. Clearly he does.