Risks to U.S. Competitiveness From a Corporate Tax Hike

The Biden administration and congressional Democrats want to increase the 21% corporate tax rate, which is the most competitive rate the country has had in years. Raising the rate would undo the years’ long effort by Republicans in Congress to enact a competitive tax rate for American companies and their employees.

The U.S. corporate tax rate was set at 21% in 2017 to “insure the United States would be globally competitive with our international competitors,” according to the House Ways and Means Committee report on the bill. At that time, the U.S. had the highest corporate tax rate in the world, a combined federal-state average rate of 38.9%, nearly 75% higher than the average world-wide corporate rate of 22.5%.

Everyone in Washington knew that the tax code was broken, and that the corporate tax rate had to be reduced. The House and Senate tax committees had conducted dozens of hearings, and numerous discussion drafts had been released. The Obama administration agreed that the  U.S. needed a lower rate, and had proposed their own corporate tax reform plan.

The U.S. corporate tax rate had been at 35% since 1993, when it was increased to that level in a tax increase bill signed by President Clinton. Since then, most other countries had reduced their corporate rates. From 2000 to 2016, every OECD country but three had reduced their corporate rates—-Chile, Columbia, and the United States. In 2000, 25 of 37 OECD countries had corporate tax rates at 30% or higher. By 2016,  most of them had reduced their rates and the average OECD tax rate had fallen to under 25%.

The U.S. was one of only two countries with a corporate rate above 35%. Most of our competitors had corporate tax rates 10 to 20 points lower than the U.S. rate, leaving the U.S. at a significant competitive disadvantage. As a result, in the two decades prior to 2017, nearly one hundred U.S. firms had moved their headquarters and operations to foreign countries to avoid the high uncompetitive U.S. rate.

Finally, after years of inaction, the Trump administration and the Republican Congress enacted the 21% rate. The rate was made permanent to insure it would be a powerful incentive for long term investment in the U.S., an incentive that is still working today. In addition, most of the 21% rate was paid for by other corporate base broadeners to insure it did not contribute to higher deficits.

The 21% rate has been enormously successful, increasing our ability to compete around the world. Economic growth and investment surged, wages rose, and unemployment fell to a 50-year low. With a competitive rate, tax inversions have disappeared and not one company has moved overseas.

Increasing the rate now to 25% or 28%, which would result in combined rates at or above 30%, would reverse all the progress that has been made making American firms more competitive. A 28%  rate, as proposed by the Biden administration, would be far from a competitive rate. At 28%, the combined U.S. rate would be 32.4%, higher than every other OECD country but one, and much higher than all our global competitors.

A 26.5% rate, as proposed by House Democrats, would also be far from a competitive rate. At 26.5%, the combined U.S. rate would be 30.9%, higher than 35 of 37 OECD countries, and more than 50% higher than the average corporate tax rates in Europe and Asia.

A recent economic study found that the 21% rate cut ”significantly increased “ America’s competitiveness. The study also said that the U.S. competitive advantage would “vanish” if the corporate tax rate was increased. It makes no sense to raise the corporate rate and once again make US companies less competitive and drive investments and jobs overseas.