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.
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