Low corporate tax rates are how we win on the global economic stage
Take the issue of attracting capital. Foreign Direct Investment is one of the ultimate prizes of international competition. As Michael Porter and Jan Rivkin wrote in the Harvard Business Review, when a company decides to build a factory with good jobs in China or Poland rather than the United States, “it is effectively voting on the question of which country can best enable its success in the global marketplace.”
There are myriad factors a company considers when making this decision, but taxation is certainly one of the major drivers.
Now, the 36 members of the Organization for Economic Co-operation and Development are considering whether to support a global minimum corporate tax rate. If adopted by member countries, a minimum tax would constrain tax competition that helps funnel inward Foreign Direct Investment. It also would force developed countries to commit to a highly distortionary and inefficient tax whose burden always falls on some combination of employees, consumers, and shareholders.
While still the leading destination of inward Foreign Direct Investment, the U.S. share of annual global FDI declined from about 40% in 2000 to about 25% in 2017. In order to attract investment, other countries lowered their corporate tax rates. This type of tax competition forced the United States to respond.
Before the enactment of the GOP’s tax reform bill in late 2017, the U.S. 35% corporate tax rate was among the highest in the developed world. Under the new law, it is now 21%, with firms facing an additional average levy of about 4.5% at the state level.
At about 25.5%, the average corporate income tax rate in the U.S. is now more in line with average rates levied by OECD members. Tax competition also works at the state level. States should be working on cutting their corporate income tax rates to improve their competitiveness, instead of relying on ineffective and opaque targeted tax incentives and subsidies to attract business and capital.
To be sure, there are a number of flaws in the GOP’s tax bill. It will increase the deficit. It focused too much on individual income tax changes that will do little to boost growth. It also failed to make permanent the immediate cost recovery of business investment, with that temporary provision expiring entirely at the end of 2026. Lawmakers should look to make this pro-growth provision permanent, and to pay for it with spending cuts, so as not to add to the deficit.
But the corporate tax cut was long overdue. It should encourage more Foreign Direct Investment and all the benefits that come with it. In 2019, the World Economic Forum ranked the U.S. as the second-most competitive economy out of the 141 surveyed, only behind Singapore. This is up from seventh place in the 2012-2013 report.
While the economy is now humming along nicely, there are ominous signs on the horizon. Manufacturing employment is falling, and so is business investment, as uncertainty about the president’s erratic trade policies proliferate and create a drag on the broader economy.
The winners in the modern economy will not be those countries that are hostile to globalization. Instead, open and dynamic economies with robust legal institutions, carefully crafted welfare and education policies, and smarter immigration, trade, and tax policies will continue to be on the cutting edge of the 21st century.
Boxing in corporate tax rates would hamstring the ability of developed countries to compete with one another to attract foreign investment — leaving us all poorer in the end.
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