Sweden may be best known among Americans as home of the Nobel
Prize and IKEA but astute politicians would be wise to take a
closer look at what this Scandinavian nation is doing
economically.
Last month, Sweden announced plans to lower its corporate tax
rate to 22% from 26.3%. In making the move, Sweden’s Minister for
Enterprise Annie Lööf said reducing the tax rate would “provide a
stimulus for both small and large businesses,” with the Swedish
government predicting “the significant reduction of the corporate
tax is expected to strengthen the investment climate and growth in
Sweden.”
With all the talk of stimulus and jobs in the closing weeks of
this political season, the time is ripe for elevating the issue of
corporate tax policy as a means of improving America’s overall
economic health and creating jobs. At 35%, the United States has
the highest federal corporate tax rate in the industrialized world.
This tax rate applies to all corporate income, regardless of
whether it is earned in the U.S. or overseas, the only difference
being that income earned outside the country is taxed twice. It’s
first taxed by the nation in which it is earned and again when it
returns to the U.S., with Uncle Sam providing a credit for taxes
paid overseas.
Corporate taxes further rise when state and local taxes are
added to the equation. In the U.S., this combined tax amounts to
39.1% and when any nation has such a high corporate tax rate, they
are automatically disadvantaged in attracting new business.
Consider a European corporation contemplating a new facility in
North America. Will it be more prone to consider locating in
Mexico, with a 30% combined corporate tax rate; Canada, with a
26.1% rate; or the United States, where income will be taxed at
39.1%? Granted, there are myriad factors involved in determining
where to locate any manufacturing operation — everything from
local tax breaks to public/private partnerships — but a topline
look at tax policy places America at a disadvantage.
The treatment of money earned overseas by American companies has
a similarly perverse effect on investment. Income that is taxed by
the country in which it was earned, followed by a second layer of
taxation when it returns to the U.S., results in American companies
being incentivized to keep that money where it is; anywhere but
America. This tax structure prevents American companies from
bringing that money home where it could be used to invest in U.S.
operations, create new jobs or increase dividends for retirees,
pension holders, and others who own stock in a company.
A reduction of the corporate tax rate to 25%, an exemption on
most income earned abroad and eliminating tax loopholes would
provide a much needed incentive to invest in America while
remaining revenue-neutral. It would put America on a level playing
field with other industrialized nations while unleashing an
estimated $1.5 trillion to invest in America, providing a
significant boost to US employment.
Good policy is good politics. The benefits of corporate tax
reform transcend traditional party politics and it’s an issue that
can resonate with all voters. Some will dispute this but it’s clear
to others around the world. When Japan lowered its corporate taxes
earlier this year, a member of that nation’s House of
Representatives, Mieko Nakabayashi, described the landscape,
saying, “With most of the world, Japan included, cutting corporate
tax rates and employing territorial tax systems to remain
competitive, the U.S. must surely know that its hesitancy to do
these things is handing the advantage to its international
competitors.”
And the price for failing to act? Nakabayashi summed it up,
saying America “will suffer from that hesitancy while we and others
outside the U.S. will benefit.” Whether the United States will
suffer or benefit from corporate tax policy is up to those who seek
to hold the public trust.
