TuckCenter for Global Business and Government

Slaughter & Rees Report - On Tax Day, Complexity Trumps Competitiveness

Today is “tax day” in the United States, the deadline for filing income tax returns and making any outstanding tax payments for the previous calendar year. You would be hard-pressed to find any U.S. taxpayer who loves (or even likes) America’s current tax system. What American citizens and companies alike find especially troubling is the system’s complexity—complexity that increasingly penalizes America in the global economy.

It is estimated that U.S. taxpayers spent more than six billion hours filling out their tax forms this year. These are not simple hours. When asked in a recent survey what they dislike about America’s tax system, more than twice as many answered “complexity of the system” as “the amount I pay.” These are not happy hours, either. Fifty-nine percent of Americans—with majorities among Democrats, independents, and Republicans alike—agree that “so much is wrong with the tax system that Congress should completely change it.”

U.S.-based multinational companies face a similarly bewildering complexity. This does not stem primarily from the statutory corporate tax rate of 35 percent—which, for the record, is the highest such tax rate of any of the 34 members of the Organization for Economic Cooperation and Development. Rather, it stems from these companies owing U.S. taxes not just on their U.S. earnings but also on any global earnings.

The United States is only one of seven OECD countries whose corporate tax regime is worldwide rather than territorial. Of those countries, most have much lower marginal tax rates. Ireland’s, for example, is just 12.5 percent. And most are much smaller countries than the United States and thus are not home to many of the world’s biggest multinationals against which U.S.-based companies compete.

The upshot? Each year the World Bank ranks countries on different dimensions of their business environment, with No. 1 being the best-performing country. In 2013, the United States ranked no lower than 25th in any category save one: “Ease of paying taxes.” Its rank? 69th.

The last time America fundamentally reformed its tax system was in 1986. A hallmark of that reform was simplicity: both the personal and business tax codes were radically simplified. But in the 27 years since, as America has continued to layer on more complexity through new tax expenditures, tax credits, and tax other-nouns-we-cannot-even-pronounce, literally dozens of countries around the world have radically reformed and simplified their tax regimes.

If anything, the pace of tax reform seems to be accelerating throughout the world. In 2012, both Canada and Japan cut their statutory corporate tax rates by 1.5 percentage points; the U.K. cut its by 1 percentage point that year and has proposed reducing it by another point this year; and both Japan and the U.K. have very recently transitioned from worldwide to territorial.

Taxes are not the be all and end all when it comes to a country’s economic health and vitality. But America’s highly-complex tax system is arguably the worst in the OECD—indeed, one of the worst in the world—when it comes to supporting the global competitiveness of domestic companies and domestic workers. At a time when America faces so many other economic challenges, is this sound public policy?

Articles © 2013 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2013 Trustees of Dartmouth College. All rights reserved.

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