So What Now? (Global Competitiveness Edition) [UPDATED]

In the coming weeks, I'm going to look ahead to the next few years of US international economic policy and examine (i) what the United States should emphasize; and (ii) whether I think the Obama administration will do so.  This series will cover a wide range of subjects, including things like trade agreements; unilateral trade liberalization; regulatory protectionism; energy; and subsidies policy.  Tonight's first installment, however, will focus on something I briefly discussed last week: how federal policies, particularly those related to business taxes and regulations, affect US companies' global competitiveness.  This subject seems particularly timely, given that US tax policy is dominating the current "fiscal cliff" negotiations in Washington, and that the future of the struggling US economy will depend, at least in part, on whether American businesses can compete in the global economy.  (And, as I've repeatedly explained here, outsourcing and protectionism would be far less common political themes if US companies became more globally-competitive due to lighter government tax and regulatory burdens.)

Unfortunately, in terms of business-friendly policies and global competitiveness, things aren't too good for the United States right now:

As I detailed in July, the United States has declined - in some cases significantly - in every independent study of global economic strength and competitiveness since President Obama took office.  These studies reflect a failure by the Obama administration to implement tax, trade and regulatory policies that could help US businesses and workers compete and prosper in the global economy.  Since July, the World Economic Forum's latest Global Competitiveness Index has dropped the United States another two places (now 7th, from 2nd in 2009, 4th in 2010 and 5th last year); respondents' top three problems with the US economy are inefficient government bureaucracy, tax rates and tax regulations - all things that the Obama administration could've addressed (especially when Democrats had total control of the US government in 2009-2010) but instead completely ignored.  The United States also has dropped from 10th to 12th in the Legatum Institute's Prosperity Index, with the US economy a mediocre 20th overall.  This is not good at all.

Not good, indeed.  Unmentioned in my note above is the World Bank's latest Doing Business survey which came out a few weeks ago and measures a wide range of regulatory policies in order to determine which countries are the best places to - unsurprisingly - do business.  While the United States remains fourth overall in the report, a closer look at the World Bank rankings shows a decline in seven of ten categories and no change in the other three:

TOPIC RANKINGS	DB 2013 Rank	DB 2012 Rank	Change in Rank
Starting a Business	13	12	-1
Dealing with Construction Permits	17	16	-1
Getting Electricity	19	19	No change
Registering Property	25	15	-10
Getting Credit	4	4	No change
Protecting Investors	6	6	No change
Paying Taxes	69	65	-4
Trading Across Borders	22	21	-1
Enforcing Contracts	6	4	-2
Resolving Insolvency	16	15	-1

As you can see, by far the worst area for the United States is tax policy, where the United States ranks a depressing 69th overall, down four spots from last year.  A breakdown of this ranking shows that the United States struggles not only with respect to total corporate tax rate (46.7%, well above the OECD average), but also in terms of tax complexity (taking a mind-boggling 175 hours - over four workweeks! - for the average New York business to prepare and file its taxes).

Adding fuel to this fire is AEI's Jim Pethokoukis, who today notes a new report from Ernst & Young on US business tax policy, including taxes on corporate income and investment (i.e., dividends and capital gains).  And things are gonna get much, much worse next year if the fiscal cliff talks fail:

- Taking into account both the corporate and investor level taxes on corporate profits and state level taxes, the United States has among the highest integrated tax rates among developed countries and these integrated tax rates will rise sharply in 2013:

- The current top US integrated dividend tax rate of 50.8 percent will rise to 68.6 percent in 2013, significantly higher than in all other OECD and BRIC countries.

- The current top US integrated capital gains tax rate of 50.8 percent will rise to 56.7 percent in 2013, the second highest among OECD and BRIC countries.

Pethokoukis next clips the section of the E&Y report which explains why these taxes are such a bad thing for economic growth and business competitiveness (and why most countries keep them relatively low):

Most developed countries provide relief from the double tax on corporate profits because it distorts important economic decisions that waste economic resources and adversely affect economic performance:

– It discourages capital investment, particularly in the corporate sector, reducing capital formation and, ultimately, living standards.

– It favors debt over equity financing, which may result in greater reliance on debt financing and leave certain sectors and companies more at risk during periods of economic weakness.

– A tax policy that discourages the payment of dividends can impact corporate governance as investors’ decisions about how to allocate capital are disrupted by the absence of signals dividend payments would normally provide.

Given these facts, it's really no surprise that tax policy remains one of the biggest areas of concern American business owners and managers who are struggling to compete against companies that reside in more accommodating countries (e.g., the 68 countries that rank better in the World Bank's "paying taxes" list and all of those to the left of the United States in the E&Y charts above).  And it all begs the question: what does President Obama intend to do about this problem?

Well, as you may recall, the President did release a tax reform plan last February that would lower the statutory federal corporate tax rate from 35 percent to 28 percent (32% with state taxes included), but that plan has gone nowhere and, beyond a glancing debate reference or two, hasn't been discussed in months.  And as I mention above, Obama didn't touch the issue during his first three years, even in 2009-10 when he and his party had total control of the US government.  So it's really anyone's guess as to whether the President intends to pursue corporate tax reform now that the election's over and he no longer needs the talking point.

Moreover, simply lowering the statutory rate a few points wouldn't really solve the tax problem that American companies now face.  First, as Cato's Dan Mitchell explains, 28 percent is still well above the rates of most industrialized countries in the world, and Obama's plan actually increases the tax burden on certain types of common corporate activity.

Second, as Pethokoukis notes, the plan also--

would leave the integrated capital gains rate more or less unchanged and the dividend rate sharply higher. As E&Y point out, a) the top federal income tax rate on dividends will increase from its current level of 15 percent to 39.6 percent in 2013; b ) the top federal income tax rate on long-term capital gains will rise from its current level of 15 percent to 20 percent in 2013; c) For many taxpayers, both dividends and capital gains will also become subject to the additional 3.8 percent Medicare tax in 2013 due to changes under the Affordable Care Act of 2010.

Finally, I'd add that it's highly unlikely that the President would significantly reform the tax code's troubling complexity by, for example, eliminating the hundreds of tax breaks (aka "subsidies") for certain types of manufacturing and green energy production.  Indeed, Obama's "old" corporate tax plan celebrates and expands these types of subsidies (more on that here).

(There's also the little problem of the fact that the vast majority of American businesses pay under the individual rates, which the President wants to raise.  But since we're talking corporate tax reform, we'll leave that little issue for another time.)

Add all of this up, and it seems highly unlikely that the United States will be surging in the global competitiveness rankings anytime soon due to serious reforms of our corporate/investment tax system or any other business regulations.  I'd be thrilled to be proven wrong next year, but I'm certainly not holding my breath.

UPDATE:  This just in:

President Barack Obama will begin budget negotiations with congressional leaders Friday by calling for $1.6 trillion in additional tax revenue over the next decade, far more than Republicans are likely to accept and double the $800 billion discussed in talks with GOP leaders during the summer of 2011.

Mr. Obama, in a meeting Tuesday with union leaders and other liberal activists, also pledged to hang tough in seeking tax increases on wealthy Americans....

The president's opening gambit, based on his 2013 budget proposal, signals Mr. Obama's intent to press his advantage on the heels of his re-election last week.

In case you're wondering, the President's 2013 Budget paid lip-service to corporate tax reform (at p. 38) but provided no actual details.