Paulson: Our Corporate Tax Code Is Broken

Treasury Secretary Henry Paulson penned a fine op-ed for the Wall Street Journal back on July 19th in order to tee up his July 26th conference on U.S. business taxation. Here’s the link (subscription required) and a few choice excerpts follow. The looming competitive disparities between the U.S. and the rest of the world that Paulson discusses are some of the same ones we’ve been writing (and warning) about, and in our view, they have contributed in part to the domestic financial upheaval of recent weeks:

In 1986, [we] simplified the tax code…The U.S. moved from a country with above-average corporate tax rates to one with below-average rates…[These] reforms set the stage for 20 years of remarkable economic performance in the U.S. and around the world…Twenty years later, after much of the world has followed our lead, the U.S. is once again a high corporate tax country. We now have, on average, the second-highest statutory corporate tax rate…Instead of building on the proven success of [the 1986] reforms, we have moved in the opposite direction, making the code more complex, adding narrow provisions that create or respond to current headlines.

Tax systems have one fundamental purpose — to raise revenue — and the best systems minimize the drag on the economy…At a time when markets change rapidly, requiring businesses to be ever more flexible and swift, they are burdened with a business tax code complicated by parochial political interests…

Over the past two decades, while U.S. tax law has grown more complicated and our statutory corporate income tax rate has increased, other nations have been reducing their rates to replicate our miracle. A study by Treasury economists estimated that a country with a tax rate one percentage point lower than another country’s attracts 3% more capital. It’s not surprising then, that average OECD corporate tax rates have trended steadily downward.

Maintaining our competitiveness in today’s global environment requires us to think comprehensively and act prudently. As Europe’s biggest economies and developing nations around the world move to reduce corporate taxes and gain the benefits for their workers that U.S. workers already enjoy, now is an opportune time, when our economy is in a position of strength, to consider ways our business tax system can be improved.

Amen, Mr. Secretary.