Corporate Tax Reform Would Benefit Nation, Workers

Abstract View of Urban Scene and Skyscrapers

Lawmakers and candidates on all sides of the political spectrum acknowledge reforming America’s corporate tax rate is overdue. President Obama has even suggested reducing the rate from 35% to 28%. Writing for Reason, Veronique de Rugy of the Mercatus Center sums up the necessity for this, concluding it’s an optimal way to benefit both businesses and the workforce:

Even such high-tax nations as France have lower rates. However, the real competition comes from Canada (26.1 percent), Denmark (25 percent), the United Kingdom (20 percent) and the many countries, such as Ireland (12.5 percent), with rates below 20 percent. Moreover, competition is intensifying. Last June, the U.K. announced that it would cut its rate from 20 percent to 18 percent in the next five years. It’s now saying that it will lower the rate even further, to 17 percent. These reductions are the final stage of drastic cuts implemented since 2007, when the country’s companies faced a 30 percent tax rate. That’s a second wave of reduction since the rate was as high as 54 percent in the 1980s.

Now contrast this with the United States. In the 1980s, policymakers responded to the pressure put on by many countries lowering their corporate rates by decreasing America’s rate from 49.7 percent to 33 percent. However, since then, the U.S. has fallen asleep on the switch (and even raised the rate by 1 percentage point in the 1990s) and is now widely out of sync with internal competition. In 2015, the average corporate rate for countries in the Organisation for Economic Co-operation and Development was 25 percent, down from 48 percent in the early 1980s.

As if that were not enough competition for American companies, the U.S. government burdens them with another layer by taxing them on a worldwide basis. In that system, income from American companies is subject to U.S. taxes whether it’s earned in Seattle, Paris or Singapore. By contrast, most wealthy countries don’t tax foreign business income; about half of OECD nations have “territorial” systems that tax firms only on domestic income. In other words, U.S. exporters face a much less competitive tax system than most of their biggest competitors…

Not everyone would like to reduce taxes on corporations, but everyone should. The data show that most of the corporate tax burden is actually shifted to workers, who end up shouldering the tax in the form of lower wages. With the U.K. taking further measures to reduce its burden on corporations, boosting its workers’ wages and inflicting yet another blow to U.S. competitiveness, Congress should do what’s right by reforming the corporate tax. It may be the one bipartisan issue out there. All we need is leadership.

Economic Freedom: Where We Rank

Everybody: "We’re number 9! We’re number 9!"

The Heritage Foundation released a list of the best and worst countries on the economic freedom scale. For more on the actual criteria, see the full post. But here are the top 10 lists:

Most Free

  1. Hong Kong (1st)
  2. Singapore (2nd)
  3. Australia (3rd)
  4. New Zealand (4th)
  5. Switzerland (5th)
  6. Canada (6th)
  7. Ireland (7th)
  8. Denmark (8th)
  9. United States (9th)
  10. Bahrain (10th)

Least Free

  1. Timor-Leste (170th)
  2. Iran (171st)
  3. D.R. of Congo (172nd)
  4. Libya (173rd)
  5. Burma (174th)
  6. Venezuela (175th)
  7. Eritrea (176th)
  8. Cuba (177th)
  9. Zimbabwe (178th)
  10. North Korea (179th)

Freedom Takes a Hit

The good news is that the United States ranks eighth out of 179 countries in the 2010 Index of Economic Freedom. The bad news, according to John Stossel (via Reason Magazine), is that the U.S. ranks behind Canada and that policies (both past and current) are threatening that freedom even more.

For the past 16 years, the index has ranked the world’s countries on the basis of their economic freedom—or lack thereof. Ten criteria are used: freedoms related to business, trade, fiscal matters, monetary matters, investment, finance, labor, government spending, property rights, and freedom from corruption.

The top 10 countries are: Hong Kong, Singapore, Australia, New Zealand, Ireland, Switzerland, Canada, the United States, Denmark, and Chile.

The bottom 10: Republic of Congo, Solomon Islands, Turkmenistan, Democratic Republic of Congo, Libya, Venezuela, Burma, Eritrea, Cuba, Zimbabwe, and North Korea.

The index demonstrates what we libertarians have long said: Economic freedom leads to prosperity. Also, the best places to live and fastest-growing economies are among the freest, and vice versa. A society will be materially well off to the extent its people have the liberty to acquire property, start businesses, and trade in a secure legal and political environment.

Bill Beach, director of the Heritage Foundation’s Center for Data Analysis, which compiles the index with The Wall Street Journal, says the index defines "economic freedom" to mean: "You can follow your dreams, express yourself, create a business, do whatever job you want. Government doesn’t run labor markets, or plan what business you can open, or over-regulate you."

We asked Beech about the U.S. ranking. "For first time in 16 years, the United States fell from the ‘totally free’ to ‘mostly free’ group. That’s a terrible development," he said. He fears that if this continues, productive people will leave the United States for freer pastures.

"The United States has been this magnet for three centuries. But today money and people can move quickly, and in less than a lifetime a great country can go by the wayside."

Why is the United States falling behind? "Our spending has been excessive. … We have the highest corporate tax rate in the world. (Government) takeovers of industries, subsidizing industries … these are the kinds of moves that happen in Third World countries. …"

Beach adds that the rule of law declined when the Obama administration declared some contracts to be null and void. For example, bondholders in the auto industry were forced to the back of the creditor line during bankruptcy. And there’s more regulation of business, such as the Dodd-Frank law for the financial industry and the new credit-card law. But how could the United States place behind Canada? Isn’t Canada practically a socialist country?

"Canada might do health care the wrong way," Beach said, "but by and large they do things the right way." Lately, Canada has lowered tax rates and reduced spending.

Too Much Government in Too Many Places

Check out these words of New York Attorney General (and candidate for governor) Andrew Cuomo:

Our system of local government is broken … New York has more than 10,521 overlapping governments, including counties, towns, villages, school districts, special districts and public authorities. These entities impose layer upon layer of taxing structures — with citizens receiving multiple tax bills annually — resulting in the highest local property tax burden in the nation … To hold government to account the people must have a government they can understand. But what they have today instead at the local level is a ramshackle mess. The current local government system is the product of sheer historical accumulation — not logic, reason or common sense.

Well said. No, make that very well said. The Indiana Chamber and many, many others have put forth a strong case in recent years that township government in our state is beyond repair. Each new revelation of outlandish township reserves, unsightly administrative costs to deliver poor relief and outright criminal behavior further makes the point.

But like most challenges, it’s not just an Indiana problem. The Governing magazine article that featured the Cuomo quote also included the following. Maybe, just maybe, the momentum will grow, lawmakers will step up to the plate and all Hoosiers will benefit.

Rich Pahls, a Nebraska state senator from Omaha, has proposed merging many of his state’s 93 counties. The jurisdictions were designed for the days of the horse and buggy, he pointed out to the New York Times, not an era when “people will drive 100 miles to the grocery store.”

New Jersey, meanwhile, has some of the highest property taxes in the country, thanks in part to its 567 municipalities, a third of them with fewer than 5,000 residents, along with 611 school districts and 486 local authorities. Bergen County alone has 70 school districts and 76 superintendents.

New York State has more than 10,500 governmental entities that levy taxes and fees, and that depend on state largesse for any number of needs. This includes towns, villages and a multiplicity of water, sewer, lighting, school, 911 and other districts. Erie County, which is where Buffalo is located, has over 1,000 such local governing entities alone.

But while political leaders in the U.S. have been talking about local government rationalization, in Denmark, they’ve actually done it.

In 2007, Denmark shrunk the number of municipalities from 271 to 98. County government was completely eliminated. Fully 455,000 local government employees were involved in the restructuring; and 30,000 physically relocated to a new site. The government projects $274 million (1.6 billion DKK) in savings from the restructuring.

The implementation of this massive reform, which began in 2002, offers important lessons as other governments look to achieve big cost savings through rationalizing local government.

Anyone hoping to rationalize the delivery of services from the state level on down must first understand where the opportunities lie to eliminate duplication and inefficiency. Then, you need to lay the groundwork for public acceptance of the change. Both of these goals can be served by gathering hard data on what every unit of government does, how much it spends and what it gets for its money. Only after these goals have been achieved can you make that information readily available to the public.

This is not an easy task. The collection of data alone is enormous. But data gives you the ability to shine a light on what is taking place under the status quo, making the tough task of driving change a little easier.