America goes it alone in corporate tax

The Wall Street Journal this morning. Fair use excerpt:

What happens when the international economy changes but tax policy does not? That is a central question facing the United States and Japan, which have the highest corporate tax rates in the industrialized world. The need for action is acute, and emerging trends in global commerce demonstrate the need for tax policies that align with those trends.

A recent analysis by Thomson Reuters of business acquisitions showed that at least 484 U.S. firms, with a value of more than $43.6 billion, have been acquired by foreign interests this year alone. One factor in these acquisitions is the different ways in which nations impose corporate income taxes.

When a company is sold, the price is established by myriad factors, one of which is the tax structure facing the buyer. Corporations based in countries with taxes lower than in the U.S. can offer a higher price because of a smaller tax liability after acquiring the new firm. In which countries do companies have the built-in advantage over American firms in a bidding process? The answer is simple. All of them.

When the U.S. last cut its corporate tax rate in 1986, 218 of the world's 500 largest corporations measured by revenue were in the U.S. Today, that number is 137.

Similarly, the number of Japanese corporations in the Fortune Global 500 fell to 68 last year from 81 in 2005. While there is no single explanation for the drop, Tax Foundation chief economist William McBride tells us: "The common thread behind all of this is the U.S. corporate tax, which is the most punitive in the developed world."

Other nations are taking actions to welcome foreign capital into their economies. A 2012 analysis by PricewaterhouseCoopers conducted for the World Bank showed 133 corporate tax reductions since 2006. The cuts reflect a world that is recognizing the need to adjust tax rates to attract new investment and provide incentives for multinational corporations to repatriate overseas profits.

The U.S. is not among these countries, and Japan has only recently recognized the importance of updating its tax policy. Japan had the highest corporate tax rate in the world until a reduction last year. Since then, the issue has become so politically potent that Japan's ruling Liberal Democratic Party is vowing further corporate tax reductions in its campaign for Sunday's elections to the Upper House.

Background reading: Corporate taxation for the layman.