Corporations have more choices today about how to structure their organizations and finances, where to locate their headquarters and operations and how to send profits to shareholders. All of this will make tax collection more difficult. Other countries are competing for this high-value-added production and jobs by lowering their corporate tax rates. The United States must follow suit.
Congress Should Extend Bonus Depreciation
A new blog by ITIF urges Congress to extend bonus depreciation through at least 2014. It makes little sense to increase the cost of investment when economic growth is still below its potential. American companies already face high statutory and effective income tax rates. Bonus depreciation encourages companies to purchase additional equipment, which in turn boosts productivity. It also increases the chance that companies will actually experience higher revenues before having to pay tax on their accounting “profits.”
Assessing U.S. Corporate Tax Reform in an Age of Global Competition
Over the past two decades other nations have steadily lowered their corporate tax rates to the point where the United States now has the highest statutory rate in the world. But we also have a very high effective rate relative to our competitors. Moreover, unlike most nations, the United States taxes companies on world-wide income. To top it off, we ranks 27th in the generosity of our research and development tax credit. This report explains the basic issues involved in tax reform and documents how the United States has fallen behind in the global competition to attract and retain business activity. It summarizes the growing literature on the link between tax rates and investment and economic growth as well as the effectiveness of the R&D tax credit in incentivizing additional private research with large social spill-over benefits. Corporate tax reform is one of the most important things Congress can do to grow the economy.
The report makes the following points and recommendations:
- The United States faces intense competitive pressure in keeping and attracting corporate investment and the jobs that come with it. This new competition limits the degrees of freedom policymakers have in crafting corporate tax policy.
- Both U.S. statutory and effective corporate tax rates are significantly higher than those of most other countries.
- The current policy of taxing the worldwide profits of U.S. companies puts them at a disadvantage when competing for world markets.
- Although lowering the statutory rate is important, it is even more important to lower the effective rate. This is best done by expanding the few tax provisions, such as the R&D tax credit and accelerated depreciation, which clearly cause companies to expand investment, while also lowering the statutory rates.
- Congress can pay for a reduction in the effective corporate tax by raising taxes on the individual side, through means such as a carbon tax, a value added tax, and/or taxing dividends, carried interest, and capital gains as normal income.
An Innovation and Competitiveness-Centered Approach to Deficit Reduction
The "Washington Consensus" on the federal budget process is grounded in faulty economic theory which leads to a fixation on reducing the debt and a focus on putting "everything on the table," coming at the expense of growth-inducing investments and long-term economic growth. A new approach to the budget is required to accomplish the dual goals of reducing the budget deficit and growing the economy. This report presents a series of recommendations designed to focus federal spending and tax policy on investments that promote growth while also reducing the national debt.