"Will be going to North Dakota today," President Trump tweeted early Wednesday morning, "to discuss tax reform and tax cuts. We are the highest-taxed nation in the world — that will change."
Twitterers in the press and in policy circles responded immediately, repeatedly, and vociferously, pointing out that other nations tax a lot more of their people's and their companies' earnings than the U.S. does.
These giddy corrections of yet another Trump error miss the crucial point that America's corporate income tax rate of 35 percent is the highest among developed economies. When you include state taxes, the rate is 38.91, twice that of the U.K., and much higher than any other member of the Organization for Economic Cooperation and Development.
This matters, and Republicans are right to target it for a big cut. Some defenders of the status quo try to wave away this country's league-leading (or is it league-losing) corporate rates by pointing out that the effective tax rate is lower. That is both true and largely irrelevant, for it doesn't dismiss the problem of high rates. Rather, it emphasizes the problem. High nominal rates and low effective rates reflect a complex tax code full of distortions that push companies to engage in tax avoidance. That is, they play uneconomical fiscal defense rather than going on the entrepreneurial offense and creating new jobs and real growth.
We've written plenty on the distortions brought about by high rates and plentiful loopholes, but you don't even have to go that far to see the harm of high marginal rates. High tax rates are bad in their own right, because they discourage investment, discourage innovation, and punish success.
If a company's tax bill adds up to "only" 25 percent of its profits, which is the effective rate in the U.S., that doesn't mean the 35 percent rate doesn't matter. The company might have paid 35 percent on its top dollar of profit and would pay 35 percent of the next dollar it earns, and the next, and on every dollar after that. This makes the reward of expansion lower. It reduces the upside for investors looking for a place to put capital to work.
The result is less business activity and thus less stuff, fewer services, and fewer jobs. More businesses are tempted to set up shop overseas, and Trump in his speech in North Dakota rightly noted that lower rates would mean fewer companies choosing to operate offshore, outside America. When you tax something, you get less of it.
Any discussion of corporate income taxes needs to acknowledge that corporations, being creatures of the law, don't actually pay taxes. The taxes fall on those who own those companies, on shareholders, on investors, employees, and customers. That is, the taxes that Apple pays, for example, mean lower prices for real people who own Apple shares, lower wages for people who work for Apple, and higher prices for people who buy Apple products.
So, Trump was wrong when he said the U.S. is the most taxed country, but his general thrust is right. We need to cut the tax rate on businesses, which is far too high.