America’s Outdated Tax System Needs an Upgrade

April 15, 2016

Tax day looms again for individuals filing their income tax returns, but in performing that duty, Americans should keep another date in mind — October 22, 1986.

That’s the day that President Ronald Reagan signed the last major tax reform overhaul into law, lowering corporate and individual tax rates while broadening the tax base. Since then, nearly three decades of inaction have left the nation trapped with an outdated tax system that stifles companies and families alike.

America’s business leaders believe a thorough upgrade of the business tax system could be the single most effective boost to economic growth that has lagged since the end of the Great Recession in 2009.

After the 1986 reforms, the U.S. corporate tax system was one of the most competitive in the world, attracting private investment and supporting robust economic growth. Other countries took notice, lowering their top corporate rates and, recognizing a move toward a global marketplace, adopting territorial international tax systems that don’t tax income at home that has been subject to tax abroad.

In fact, all advanced industrialized nations have a lower corporate tax rate today than they had when the 1986 reforms took full effect, except for the United States and Chile. At 39 percent, today’s combined U.S. federal and state corporate tax rate remains a full 14 percentage points above the average of other industrialized countries.

All advanced industrialized nations have a lower corporate tax rate today than they had when the 1986 reforms took full effect, except for the United States and Chile.

The disparity has real consequences for the United States. In fact, over the last 10 years alone, America’s uncompetitive corporate tax rate has led to an estimated loss of 1,300 U.S. companies to foreign competitors. Innovation and jobs went with them.

American workers are feeling the direct impact of this antiquated system at home because higher corporate taxes reduce U.S. investment and hold back worker productivity. Research shows that as much as 75 percent of the corporate tax burden is borne by workers through lower wages because of lost productivity. America’s tax system is pushing workers’ wages down and keeping them from bringing larger salaries back to their families.

Studies have found that an upgraded tax system will boost American wages and increase business investment. Policymakers should start with a competitive rate and modern international tax rules that help create jobs, expand family incomes and make businesses more globally competitive.

Fortunately, bipartisan agreement exists to modernize the U.S. tax system and lower the corporate tax rate, and Congressional leaders are currently working on proposals to do just that. The business community supports these efforts and is putting everything on the table. It took bipartisan cooperation — and leadership — to enact tax reform in 1986, and it will require the same to do so again.

As this April 18th Tax Day approaches, America’s leaders and the public need to also think about the future, a more globally competitive one that puts people to work.