(CNSNews.com) – When Japan officially reduced its corporate tax rate from 39.8 to 36.8 percent on Sunday the United States became the country with the highest corporate tax rate in the world – 39.2 percent.
The U.S. rate is made up of the federal business tax rate of 35 percent plus the average rate from among the states. The figure does not equal what American corporations actually pay – the effective tax rate – but represents the marginal tax rate all businesses must face.
Japan became the last in a long line of developed countries to have reduced their marginal corporate tax rates since 1990, a trend the U.S. has ignored. The average corporate tax rates in the developed world was 26 percent in 2010, according to the Organization for Economic Cooperation and Development (OECD).
High marginal tax rates can have a negative effect on business investment, posing a barrier for new businesses which must earn enough money to overcome the taxes they must pay. If a business cannot do that, investment becomes a losing proposition.
In other words, higher marginal tax rates make investing in existing businesses a losing affair because taxes eat up the additional revenue generated by the investment, making it harder for investors to get their money back.
The national business tax rate matters most in a world economy, Heritage Foundation tax analyst Curtis Dubay told CNSNews.com, because it means that U.S. firms cannot attract foreign investment.
“The reason why this is important is that is puts us at a disadvantage for winning the new investment that businesses are looking to undertake because the after-tax returns are going to be higher in all those countries with lower rates,” he said.
Dubay noted further that multinational corporations are more likely to locate their headquarters in foreign countries and U.S. multinationals are more likely to be bought out by their foreign competitors, because their international revenues will face lower tax rates than in the U.S.
“Because of our uncompetitive rate, we are making our multinational businesses prime targets for takeovers by their foreign competitors,” he said. “We saw this with the purchase of Anheuser-Busch by the Belgian company InBev back in 2008. The reason why InBev bought Anheuser-Busch and not the other way around was that the company was simply more valuable being a Belgian company because they have a lower corporate tax rate than the U.S.”
While domestic corporations rarely pay the full 39.2 percent business tax rate – taking advantage of every federal loophole and credit they can – in a global economy a high corporate rate means capital, and jobs, stay overseas, even for U.S.-based firms.
U.S. multinational firms must pay American tax rates on income they bring back to the U.S., if they decide to bring it back at all. Many firms merely keep the money reinvested in overseas ventures, using it to build new plants or expand existing business abroad, thus depriving the U.S. of investment capital and badly needed new jobs.
Congress has long considered a tax holiday on this type of business income, hoping the measure would entice U.S. multinationals to bring their foreign-earned income home.
A holiday would only apply for a short period of time, however. Critics argue that it would not be very effective in the long run, since U.S. multinationals would still keep income overseas once the holiday was over.
Instead, Republican leaders and even President Obama have proposed lowering the marginal corporate tax rate, to bring it closer to the OECD average in hopes of making the U.S. more competitive for foreign investment and enticing U.S. multinationals to reinvest their foreign profits in their American ventures.