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Let’s Raise a Glass to Ireland’s Corporate Tax Rate

e21 | 03/14/2014 |

Rather than wearing green ties for St. Patrick's Day, how about we copy Ireland's tax system?

The top U.S. combined state and federal corporate tax rate is 39 percent—50 percent higher than the OECD average and triple Ireland's rate of 12.5 percent.

Since the late 1980s, nearly all industrialized countries have lowered their corporate tax rates. Since 1988, the average OECD combined federal and state corporate tax rate declined from 44 percent to 25 percent. Ireland has led the way by lowering its rate nearly 75 percent. Ireland’s corporate tax cuts have clearly paid off—its GDP doubled between 2001 and 2006.

The United States has refused to follow the global trend. The combined U.S. federal and state corporate income tax rate actually increased since 1988. There are major economic consequences to an uncompetitive corporate tax system. Increasingly, business competition is international, capital is mobile, and talent is found worldwide.

The high corporate tax burden in America is one reason U.S. multinationals are creating more jobs abroad and keeping more money overseas. U.S. non-banking multinational companies employed 50 percent more foreign workers in 2011 than in 1999. Domestic employment by these companies declined over the same period. U.S. multinationals are also holding $1.7 trillion in cash abroad. Heavy repatriation tax burdens await if earnings were to be brought to the United States. High corporate tax rates punish companies for investing in America.

The nonpartisan Tax Foundation estimates that reducing the federal corporate rate by ten percentage points would provide taxpayers with an average of two percent more income. Boston University professor Laurence Kotlikoff also found eliminating or lowering America’s corporate tax rate would lead to rapid increases in real wages, by as much as 12 percent. 

Lower taxes can lead to higher tax revenue in the long term as more companies expand their operations in the United States. The fiscal benefits of an across-the-board corporate tax rate cut show themselves years down the road with increased revenue. This is why lowering the corporate tax rate would help balance the budget. As U.S. debt continues to climb, proposals that offer deficit relief should be welcomed by all political parties.

Lower corporate tax rates also weaken the connection between Big Business and Washington. When everyone—not just companies that can afford the legal and accounting fees to navigate tax code—pays a lower rate, more productive competition will shift from Capitol Hill to the marketplace. 

When there is less incentive to lobby Congress, companies put more resources into improving their products and cutting prices—which benefits consumers. Similarly, corporate expenses on tax accountants would be slashed, allowing corporations to invest even more in their products. 

The corporate tax began in the Progressive Era as a way to tax the rich until the 16th Amendment, allowing income taxation, was ratified in 1913. Since then, the corporate tax burden has expanded substantially and now casts a wide net. Pension funds, mutual funds, and tax-deferred retirement accounts all hold corporate stock, and they greatly benefit the middle-class. Raising corporate taxes also increases the costs of low-margin goods, such as groceries, energy, and apparel, which low-income Americans spend a disproportionate share of their incomes on. As has happened with so many other taxes, what was once meant to soak only the wealthiest has come to disproportionately harm the rest of the country instead.

Unfortunately, many politicians who swear by their Irish ancestors and who will swig green beer on St. Patrick’s Day are adamantly opposed to lowering corporate tax rates to match the Old Country’s.

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