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July 11. 2013

What’s Wrong With America’s Tax System – And How Reform Can Help

In 1988, the U.S. corporate tax rate (federal plus average state) was 38.6 percent, almost six percentage points lower than the average for other developed countries (44.3 percent for other OECD member countries). In the quarter century since then, other developed countries have steadily lowered their rates, turning the tables on what was once an American strength. Today, America’s 39.1 percent corporate tax rate holds the dubious distinction of being higher than the rate of any other country in the industrialized world, 14 percentage points higher than the 25.1 percent average of other developed countries.

And while most developed countries have modernized their international tax systems to allow their companies to compete on a level playing field in global markets and freely invest their foreign earnings at home, the U.S. has stuck to an outdated system that penalizes our companies when they reinvest foreign earnings at home. This hurts American workers, American businesses, and the American economy as a whole.

Comprehensive tax reform that includes a lower rate and a modern international tax system would help our economy by:

  • Encouraging global companies to invest in America. Reforming our tax system to make America a more attractive place to do business will bring jobs for working families and economic growth for local communities and our country as a whole.
  • Generating more good jobs for American workers. Our nation’s global companies directly employed 22.9 million American workers in 2011 and supported another 40 million jobs through their supply chains and payrolls.  With a modern international tax system that allows American companies to compete more effectively abroad and reinvest earnings at home, more jobs will be created for working families in the United States.
  • Supporting small businesses. Companies large and small rely on local businesses for their supply chain. Right now, each global American company buys an average of $3 billion worth of goods from more than 6,000 American small businesses. Tax reform that removes barriers and encourages global businesses to invest in America would give critical support to entrepreneurs and hard-working Americans in our towns and local communities.
  • Spurring capital investment and research and development in the United States. A modern international tax system will help American-based businesses invest more in domestic capital investment and innovation, which not only means more jobs—from construction to research—but also creates more opportunities for American breakthroughs in products and technologies that are the key to our nation’s future prosperity.
  • Improving the economic health of state and local governments. A stronger economy means healthier state and local finances, pension funds, and state and local tax revenues that can be used for public schools, paying local police officers and firefighters, and maintaining America’s roads and bridges, benefiting our families and businesses.

As former President Bill Clinton has said, “We have an uncompetitive rate,” and “we’re now the only wealthy nation that taxes income earned overseas when it’s brought back home.” Lowering that rate to be in line with global norms and adopting a modern international tax system will lead to more U.S. job creation, more American investment, and more economic growth.