Corporate tax cuts: U.S. is falling behind.

• Position: United States

Seven nations in the European Union cut their corporate income tax rates this year. In the past five years, 16 EU countries have done so, as have 24 EU nations since 1995, reports Daniel J. Mitchell, senior fellow at the Cato Institute, Washington, D.C. In fact, Europe is on a corporate tax-chopping binge, with rates failing substantially since the 1990s. According to a recent survey by KPMG, the average corporate tax rate in the EU has fallen from 38% in 1996 to 24% in 2007.

Moreover, the appetite for lower corporate tax rates has not yet been sated. Further corporate rate modifications are being implemented in Germany, Estonia, Spain, and the United Kingdom, and they are being discussed in the Czech Republic and France, Mitchell reports.

European nations are not the only ones reducing corporate tax rates. In 2002, Australia went down to 30%, and now New Zealand has announced that it will drop its rate to match Australia's. Singapore's rate is scheduled to fall from 20 to 18%. Canada is planning to slice its corporate rate by two percentage points, and Russia is considering a four percentage point reduction. All this movement largely is driven by tax competition. Thanks to globalization, it is much easier for capital to cross national borders, and investors naturally prefer lower-tax jurisdictions. This is prompting governments to lower tax rates on corporations and capital, Mitchell affirms.

However, the U.S. is falling behind in the global trend of reducing corporate tax rates. This is ironic because the U.S. used to be a tax reform leader. Under Pres. Ronald Reagan, the Federal corporate tax rate was changed from 46% to 34% in 1986, significantly improving America's competitive position. Yet, since the late 1980s, other nations have jumped on the tax-cutting bandwagon, and the fiscal landscape has changed dramatically. America's corporate tax advantage has become a big liability. Indeed, U.S. policy moved in the wrong direction in 1993, says Mitchell, when Pres. Bill Clinton pushed the Federal corporate rate up to 35%. With the addition of state-level corporate taxes. America's average corporate tax rate is 40%, Mitchell relates.

Every developed nation except the U.S. has reduced corporate rates since the Reagan tax...