The United  States now has the highest statutorycorporate-income tax rate among developed countries. Even after various deductions, credits, and other tax breaks, theeffective marginal rate – the rate that corporations pay on new US investments– remains one of the highest in the world.

In a world of mobile capital, corporate-tax rates matter, and businessdecisions about how and where to invest are increasingly sensitive to nationaldifferences. America’s relatively high rateencourages US companies to locate their investment, production, and employmentin foreign countries, and discourages foreign companies from locating in theUS, which means slower growth, fewer jobs, smaller productivity gains, andlower real wages.

According to conventional wisdom, the corporate-taxburden is borne principally by the owners of capital in the form of lowerreturns. But, ascapital becomes more mobile, relatively immobile workers are bearingmore of the burden in the form of lower wages and fewer job opportunities.That is why countries around the world have beencutting their corporate-tax rates. The resulting “race to the bottom”reflects intensifying global competition for capital and technological knowhowto support local jobs and wages.

Moreover, a high corporate-tax rate is an ineffective andcostly tool for producing revenues, owing to innovative financial transactionsand legal tax-avoidance mechanisms. Acompany’s legal residence and geographic sources of income can be and are manipulatedfor such purposes, and the incentives and scope for such manipulation areespecially large in sectors where competitive advantage depends on intangiblecapital and knowledge – sectors that play a major role in the US economy’scompetitiveness.

In the absence of close and broad international cooperation, the US must jointhe race and lower its corporate-tax rate. A lower rate would strengthenincentives for investment and job creation in the US, and weaken incentives for taxavoidance. It would also reduce numerous efficiency-reducing distortions in theUStax code, including substantial tax advantages for debt financing over equityfinancing and for non-corporate businesses over corporate businesses.

But each percentage-point reduction in the corporate-taxrate would reduce federal revenues by about $12 billion per year. These revenue losses couldbe offset by curtailing so-called “corporate-tax expenditures” –deductions, credits, and other special taxprovisions that subsidize some economic activities while penalizingothers – and broadening the corporate-tax base.Both President Barack Obama’s plan for business-tax reform and theSimpson-Bowles deficit-reduction plan propose reducing such expenditures to payfor a reduction in the corporate-tax rate.

Corporate-tax expenditures narrow the base, raise thecost of tax compliance, and distort decisions about investment projects, how tofinance them, what form of business organization to adopt, and where to produce. As Michael Greenstone and Adam Looney show in ajust-released report,the resulting differences in effective tax rates for different kinds ofbusiness activity are substantial.

That said, if the goal of corporate-tax reformis to boost investment and job creation, broadening the tax base to pay for alower rate could be counterproductive. Eliminating “special interest”loopholes, like tax breaks for oil and gas, or for corporate jets, would notyield enough revenue to pay for a meaningful rate cut. And curtailing accelerated depreciation, themanufacturing production deduction, and the R&D tax credit – which accountfor about 80% of corporate-tax expenditures – would involve significanttradeoffs.

Indeed, cutting these items to “pay for” a reduction in the corporate-taxrate could end up increasing the tax on corporate economic activity in the US. Eliminatingaccelerated depreciation for equipment would raise the effective tax rate onnew investments; repealing thedomestic-production deduction would increase the effective tax rate on USmanufacturing; and rescinding the R&Dtax credit would reduce investment in innovation.

Instead of cutting proven tax incentives for businessinvestment, the USshould offset at least some of the revenue losses from a lower corporate-taxrate by raising tax rates on corporate shareholders. Most countries that reduced their corporate-tax rates have followed thispath, while the UShas done the opposite.

At 15%, America’stax rates on dividends and capital gains are at historic lows, while the profitshare of national income is at an all-timehigh. Defenders of low rates for capital owners argue that it minimizes “double” taxation of corporate income – first of thecorporation and then of its shareholders. Alower corporate-tax rate would weaken this justification. Moreover,pension funds, retirement plans, and non-profit organizations, which receiveabout 50% of all corporate dividends, do not pay tax on these earnings, andwould benefit from a lower corporate-tax rate.

Although individual taxes on corporate income reduce the after-taxreturn to savings, they have less distorting effects on investment locationthan corporate taxes do, and they are more likely to fall on owners of capitalthan on workers. Moreover,it is far easier to collect taxes from individual citizens and residentshareholders than from multinational corporations. Apple can usesophisticated techniques to manipulate the location of its corporate income,but individual UScitizens who own Apple stock have to report the dividends and capital gainsthat they earn from it in their worldwide income.  

A recentstudy found that taxing capital gains and dividends as ordinary income,subject to a maximum 28% rate on long-term capital gains (the pre-1997 rate),could finance a cut in the corporate-tax rate from 35% to 26%. Such a changewould reduce corporations’ incentives to move investments abroad or shiftprofits to low-tax jurisdictions, while increasing the progressivity of taxoutcomes by shifting more of the burden of corporate taxation from labor tocapital owners.

An increase in the corporate-tax rate appeals to many US voters who believe thatcorporations are not paying their fair share of taxes and are worried aboutwidening income inequality. But, in a world of mobile capital, raising thecorporate tax rate – or simply leaving it at its current level – would be a badway to generate revenue, a bad way to increase the tax system’s progressivity,and a bad way to help American workers