A Chequer-Board of Nights and Days

The Economist points out that it is high time for a corporate tax cut:

IT IS more than two decades since America led the world in tax reform, and what Ronald Reagan called "that old jalopy of our tax system" is looking in need of a lot more than a new spray of paint. Last week Hank Paulson, the treasury secretary, held a summit in Washington, DC, to address the part of the system that is most visibly lagging behind best practice in the rest of the world--the taxation of firms.

The gathering of tax experts, business leaders and other heavy-hitters, including Alan Greenspan, former chairman of the Federal Reserve, agreed with Mr Paulson that Uncle Sam was "undermining the competitiveness of American workers" with high corporate tax rates. However, nobody at the summit expected Congress to do much about it, especially given its current preoccupation with easing taxes on the middle class and increasing them on the rich, particularly those who have made their fortunes in private equity.

 America's competitiveness problem has been a constant theme of Mr Paulson's time at the Treasury, which he joined a year ago after running Goldman Sachs. As well as taxes, he is worried that America's capital markets are struggling to hold their own against resurgent financial centres such as London and Hong Kong.

Corporate-tax reform was a key part of the Reagan blitz, too. Following the Tax Reform Act of 1986, the base of the corporate income tax was broadened but the top rate was slashed by 12 percentage points, from 46% to 34%, the biggest cut since the tax was introduced in 1909. Thus began a trend of reducing the tax rate on companies that has spread across the globe. However, whilst countries from Ireland (with a rate of 13%) to China--which recently passed a law cutting the rate to 25%--have continued to lower corporate taxes, American rates have edged back up, to 35%, in 1993. Adding state taxes to federal ones gives an overall rate of 39%. That is the second highest in the OECD, in which the average rate is 31% (see chart).

In a world of multinational firms and mobile capital, tax rates can make a significant difference to where profits are recorded and business is done, though economists disagree on how much. Governments outside America have long worried that competition between countries to attract international businesses creates pressure to lower corporate tax rates. America is now belatedly starting to agree with them.

To be fair, the article does not that the US becomes more business-friendly when one takes into account the "effective marginal tax rate," which considers allowances and breaks in the equation. But with equity capital subject to double taxation and given the fact that really large firms with a global reach are not able to become S corporations, the US is still not as welcoming as it could be for business investment and for an increase in worker productivity.

Unfortunately, as the article notes, the current Congressional mood is heavily set against a cut in the corporate tax rate. That, to be sure, is much too bad; given the credit crunch and the continuing problems with the housing market, it would be nice if we could stimulate more business activity with a corporate tax cut that makes the United States more competitive with other countries. But "tax cut" is a dirty word amongst the majority members of the 110th Congress. I'm not sure that we're even going to get to the second stage of reactions to a new idea President Reagan once talked about.