Reforming the corporate tax system - four things that matter.

• Author: Boyle, Michael P.

The following op-ed piece has been submitted to newspapers around the United States.

Tax reform is a lot like the weather--everyone talks about it but no one seems to do anything about. Incoming New Treasury Secretary Henry Paulson should change that by focusing forthright on the gaping need for corporate tax reform. To be sure, Congress should not ignore the need to revise the tax rules governing individuals, but modernizing America's business tax system is critical to promoting growth, creating jobs, and narrowing the budget deficit. In deciding how best to reshape the rules, Secretary Paulson and Congress must recognize four things.

First, America's Tax System Must Be Competitive. Every day we make choices based on cost: If gasoline is selling for 10 cents less a gallon on the left-hand side of the street than on the right, very few of us turn right to fill up the car. Similarly with taxes: They are a cost that a business rightly considers as it locates new plants, creates distribution networks, and hires workers. To be sure, taxes are not the only or most important cost to be considered, but they do matter.

A primary reason that taxes matter is that U.S. business does not operate in a closed system. Some economists bemoan tax competition as "a race to the bottom," but the competition is real, persistent, and effective. Our foreign trading partners are not shy in vying for new plants, research facilities, and distribution centers, by lowering rates, paying grants, or granting special tax incentives. The U.S. system must change in order to remain competitive.

Second, Tax Rates Matter. A critical aspect of tax competition is the tax rate. Regrettably, while the Bush Administration has moved to reduce individual tax rates, the corporate rate has remained unchanged since the 1990s. Whereas the United States once had one of the lowest corporate tax rates in the industrial world, it now comes in near the top of the list.

In contrast, lowering tax rates has become the rule of the day in Europe. For example, in 1999 Ireland passed legislation that over time reduced its overall corporate rate to 12.5 percent (slightly more than one third the U.S. rate), which has helped spur strong economic growth. The Celtic Tiger is not a myth--it's a reality, and the results (including jobs, economic development, and tax revenues) have prompted Ireland's neighbors to follow suit, with Germany and Spain being the most recent countries to announce significant...