Competitiveness, Tax Base Erosion, and the Essential Dilemma of Corporate Tax Reform

Label contradicts reality for the U.S. international corporate tax system. The U.S. system is typically labeled as a worldwide tax system with a statutory rate of 35%, both uncommon features among our trading partners. Yet these markers of the U.S. tax system do not accurately describe reality, where multinational firms routinely face far lower effective tax rates and little, if any, tax is collected on foreign income. Understanding this discrepancy between label and reality is essential to evaluate recent policy debates surrounding corporate inversions and the competitiveness of the U.S. international tax system. Although there is an essential policy tradeoff between “competitiveness” (an ill-defined term) and corporate tax base protection, there is little evidence that U.S. multinational firms have a competitiveness problem. However, new evidence shows that corporate tax base erosion is a large and increasing problem. There are several options for reform that would address corporate tax base erosion