The United States is number one, but this achievement is nothing to celebrate.
As of April 1, the United States has the highest corporate tax rate among developed economies after the previous holder of the top spot, Japan, reduced its rate.
Reaching a milestone of this magnitude — number one in the world — often requires hard work, but in this case, it was easy. The United States didn’t have to do anything. Our top corporate tax rate has hovered at 35 percent for years. Meanwhile, other countries have gotten the message that lowering corporate taxes encourages growth. Canada has engaged in a series of cuts, ultimately reducing its corporate rate to 15 percent. Great Britain recently announced it will drop its corporate tax to 24 percent next month and then 22 percent by 2014.
As other nations take steps to improve their competitiveness and attract investment, the United States has stood still. As a result, we’ve placed ourselves at a significant disadvantage in the global economy.
Manufacturers in particular feel the brunt of our policies. It is 20 percent more expensive to manufacture in the United States than it is among our major trading partners — excluding the cost of labor — according to a recent study by the Manufacturing Institute and MAPI. Corporate taxes are the primary driver of this cost differential.
High corporate tax rates have a number of harmful effects on the economy. For one, they sap resources that businesses in the United States could use to expand and create new jobs. In addition, for manufacturers from around the world looking to expand into new markets, our number ranking is not a strong advertisement.
The good news is that Washington recognizes our corporate tax regime is a problem. Both Democrats and Republicans have expressed support for corporate tax reform and have offered ideas about what they would like to see. If policymakers focus solely on corporate taxes, however, they’ll miss the majority of enterprises in the United States.
All manufacturers — all businesses — deserve an opportunity to thrive in a pro-growth business climate. In fact, 65 percent of manufacturers aren’t organized as corporations at all. They pay taxes at individual rates, which are scheduled to rise at the end of the year and also must be addressed with a focus on our competitive challenges.
If Congress and the president put politics ahead of policy and do nothing about the expiring tax rates, some manufacturers will face the prospect of paying more than 40 percent of their income in taxes — and that’s just at the federal level. Add in state and local taxes, and small and medium-sized manufacturers will face a stifling tax burden.
The United States’ ascent to the top of the world corporate tax ranking is a reminder that the world is growing more competitive — and we’re not keeping pace. The average corporate tax rate among the world’s major economies hovers around 25 percent, and it’s on the way down. That’s a good target for the United States, and it’s certainly better than our current 35 percent rate. But then again the United States didn’t achieve its position of economic leadership by being average. The ultimate goal of tax reform should be making both small and large manufacturers competitive and making the United States the number one country in which to invest and create jobs.
Jay Timmons is president and CEO of the National Association of Manufacturers.