The antiquated method Washington uses to tax American corporations is seriously hampering our country's global competitiveness and economic growth.
It has been more than a quarter of a century since Washington produced major corporate tax reform. Since then we have seen the birth of the Internet, an explosion in cross-border foreign investment and a dramatic increase in global competition for capital and jobs. The way America does business in 2012 looks nothing like the way it did in 1986, but our corporate tax code does.
The antiquated method Washington uses to tax American corporations -- designed on the assumption that our businesses are removed from international competition and conduct a small amount of sales abroad -- is seriously hampering our country's global competitiveness and economic growth. The next president, whether it is Mitt Romney or Barack Obama, must address two significant competitive disadvantages of the American corporate code: an exceptionally high rate and an outdated approach to the foreign operations of American businesses.
The average corporate tax rate of our primary trading partners is currently 25.1 percent, and the trend is to keep going lower. Canada, for example, just dropped its rate to 16.5 percent, with plans to bring it down to 15 percent by next year. Even Sweden, not exactly famous for its low taxes, just announced that it was dropping its rate to 22 percent. The United States, in contrast, currently taxes its corporations at a remarkably uncompetitive rate of 35 percent, the highest among industrialized nations.
And unlike many of our trading rivals such as the United Kingdom, France and Japan, the foreign earnings of American corporations, upon repatriation, are subject to our high corporation tax. This outdated system distorts the international behavior of U.S. companies and has kept as much as $1.4 trillion of their capital abroad for tax advantages. This represents a serious opportunity cost for the United States economy and is money that could otherwise be paid to workers, invested or returned to shareholders here at home.
The hard reality is that our corporate tax code is creating a powerful financial incentive to do business abroad. In 1960, seventeen of the world's largest corporations were U.S.-headquartered; by 2010, only six of them had an American address. And a recent Wall Street Journal study found that while 35 large U.S.-based multinational companies -- including Wal-Mart, International Paper and Honeywell -- added jobs much faster than other U.S. employers in the past two years, nearly three-fourths of those jobs were overseas. America's lack of corporate tax competitiveness is driving jobs, growth and investment abroad.
Reducing and reforming America's corporate tax code will have immediate and long-term economic benefits. A study by the Journal of Public Economics shows that a 10-point rate cut could increase America's annual economic growth rate by 1 or 2 percentage points, which would result in another million new jobs per year. The American Action Forum also estimates that reducing taxes on repatriated earnings would create a short-term economic stimulus: the amount of capital American corporations would return to the United States would increase GDP by roughly $360 billion and create approximately 2.9 million new jobs.
Amending our corporate tax code is not about reducing the amount American corporations send to the IRS. Part of meaningful reform must be eliminating the littering of preferences and loopholes added by lobbyists and legislators over the years that permitted General Electric not to pay a cent of taxes in 2010. But by lowering rates, we will expand the corporate tax base by eliminating the need for corporations to keep profits offshore and away from American taxes altogether. The economic activity created by a more competitive corporate tax code will also generate more revenue for Washington at a time when our national debt has reached a tipping point.
Reform of the American corporate tax code is needed now. Our high corporate tax rate is a serious detriment to America's economic performance and makes us an outlier among our competitors. By standing still, the United States is falling behind fast.