August 15, 2006
Sullivan Says U.S. Falling Behind in Corporate Tax Competition
For immediate release
Media contact: William Ahern (202) 464-5101
Washington, D.C.—The United States should cut its top corporate tax rate to at least 25 percent to keep up with foreign tax competition, according to Martin Sullivan, a contributing editor at Tax Analysts who has written two books on tax reform and served on the staffs of the Treasury Department and the Joint Committee on Taxation. (Full interview at http://www.taxfoundation.org/podcast/show/1759.html).
“By standing still, we’re moving backward,” said Sullivan. “The average corporate tax rate in Europe has dropped by ten percentage points from 43 to 33 percent. Meanwhile, in the United States, the combined federal-state corporate rate has been the same for 13 years, about 39.5 percent. Now only Japan has a higher tax rate.”
Sullivan made his comments on a wide range of tax issues in a conversation with Tax Foundation President Scott Hodge, in the foundation’s new podcast series.
Sullivan considers cutting corporate tax rates to be a good issue for Democrats, not just Republicans as conventional thinking would have it.
“Many left-leaning governments -- Spain, the United Kingdom, and Germany under Schroeder -- have done precisely this,” said Sullivan. “They’ve lowered their rates, simultaneously increasing their competitiveness and saving their corporate taxes from extinction. I think the Democrats here could learn something from them.”
Sullivan sees three reasons that European corporate tax collections have stayed strong despite rate cuts.
Base-broadening: Just as the United States did during the Tax Reform Act of 1986, Europeans have broadened their tax bases, closing loopholes and restricting tax breaks as they cut the rates.
Less transfer pricing: The lower statutory tax rates mean that businesses in Europe no longer have to engage in a lot of transfer pricing in order to shift profits out of Europe, and that brings some revenue back in.
New investment: Lower rates have spurred some increased corporate investment. Dynamic revenue estimates are often oversold, but in the case of corporate taxes, because corporate capital is so mobile and because the corporate tax is so inefficient, those dynamic effects are important.
Sullivan thinks rate cuts are important enough to warrant re-considering the affordability of such popular tax breaks as accelerated depreciation and even the research credit. He would also tighten up some of the transfer pricing rules, all with the goal of a more efficient tax system that kept revenue strong with lower rates.
In what he called “the war between the states,” i.e. state tax competition, Sullivan would like to see the states compete on rates but agree to a common tax base.
“States would no longer get into the business of having special incentives, depreciation, or investment credits. We want to simplify the tax rules for business and keep government, as much as possible, out of the business of picking winners and losers.”
The interview is Number 5 in the Tax Foundation’s podcast series. It’s available online at http://www.taxfoundation.org/podcast/show/1759.html. The Foundation publishes a podcast each Tuesday, featuring an interview that sheds light on the nation’s tax system.
Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
