US Tax Rates Are No Longer Competitive
Taxes are a critical component of any nation’s worldwide financial competitiveness. In today’s global economy, tax laws are a key driver of business decisions regarding capital investment and physical location. Nations can no longer levy high taxes on business activities without adversely impacting their own economies. Many countries now recognize this, and have implemented tax reforms to improve their competitiveness - while others have failed to do so and are falling behind as a result.
Unfortunately, the United States is a good example of the latter, with a tax code that is simply no longer competitive. The last major change to the nation’s tax laws occurred three decades ago, as part of the Tax Reform Act of 1986. That’s when the U.S. Congress dropped the top marginal corporate tax rate from 46 percent to 34 percent, to increase the international competitiveness of U.S. corporations.
Member countries of the Organization for Economic Cooperation and Development (OECD) have since followed suit, cutting their average corporate tax rate from 47.5% during the early 1980s to about 25% today. As a matter of fact, the only OECD countries that have yet to cut their corporate tax rates since the onset of the new millennia are Chile, Norway, and the United States. In 1993, the U.S. government actually moved in the opposite direction, raising its top marginal corporate tax rate to 35%! As a result, the United States now has the highest corporate income tax rate in the world. This discourages investment in the United States by domestic and foreign corporations, alike.
Furthermore, the United States is one of only six OECD countries imposing a global tax on overseas profits earned by domestically-owned businesses. Since these offshore profits are already subject to taxation in the country where they are earned, American companies have an obvious incentive to avoid paying taxes twice on the exact same earnings. That’s why many of the largest U.S. corporations have established corporate centers overseas - where tax codes are less stringent - in order to avoid this extra tax.
Most OECD countries - and all of the other countries in the G7 - have exemptions that allow their resident multinationals to only pay income taxes to the country in which their profits were earned. However, the US tax system requires companies to pay the difference between the US tax rate and foreign tax rates when repatriating profits from their overseas affiliates. This encourages US-based multinationals to invest their profits overseas - rather than at home - since they can defer US taxes on these funds until they are repatriated to the U.S. parent firm.
Individual Americans are taxed at up to 39.6% of their worldwide income, and our capital gain rates far exceed those imposed by most other nations in the industrialized world. Our average top capital gain rate ranks sixth in the OECD, at 28.7%, which doesn’t even include the 3.8% Obamacare tax. This is more than ten percentage points higher than the OECD average of 18.2%.
The tax picture is even worse in the Golden State. California taxpayers face a top marginal rate of 33% - the third-highest in the industrialized world. Worse still, capital gains are taxed as ordinary income. Those taxpayers earning $254,250 to $305,100 per year pay 10.3%, and individuals earning over $1 million per year pay 13.3%. At the federal level, the capital gain rate is 15% for some, and 20% for higher income taxpayers. Add in the 3.8% investment tax under Obamacare, and many taxpayers will wind up paying 23.8%. Altogether, you could be paying as much as a 33% combined federal and state tax on capital gains in California - more than virtually anyone else in the world. These high tax rates drive investment offshore, leading to slower economic growth for the United States.