Europeans, China Outpace U.S. on Corporate Tax Reductions

At a time when job creation is the number one problem and a chief goal for Washington, D.C., many tax experts say U.S. corporate tax policies are falling behind European nations -- known for their expensive social welfare systems and the high income and sales taxes that go with them.

In fact, the United States has higher corporate taxes, which affects job creation, than all but one of the major economies of the world.

"There's a big misconception that Europe has much higher tax rates than the U.S., and that's no longer the case in many aspects, especially corporate taxes," said Scott Hodge, president of the Tax Foundation.

Although U.S. income taxes are lower than in Europe, the total tax burden for Europeans is an average of 38 percent, which includes income and sales taxes and a consumption tax known as value added tax. That average is 10 points higher than the United States at 28 percent.

But the United States is a close second to the highest corporate tax rate in the world, which belongs to Japan at 39 and a half percent. The United States is just below that at 39.1 percent.

In a grouping of 30 large economies known as the Organization for Economic Cooperation and Development, or OECD, 21 of 30 countries,  including all of Europe, had corporate tax rates in the 20 percent range or lower. Ireland is the lowest at 12.5 percent.

"We're shooting ourselves in the foot by imposing these high taxes because we're making the U.S. difficult place to do business in and to do business from," Hodge said.

William Gale, vice president and director of the Economic Studies Program at the Brookings Institution, said incentives for job creation come in many forms, including reducing regulations, but taxes are a key part.

Taxes definitely have impact on investment, there's no question," he said. "Without trying to be alarmist -- we're losing our edge relative to other countries in terms of this being an attractive place to invest."

The OECD survey of its nations tax policies found that high corporate taxes were the most harmful for long-term growth. That's why so many other nations have been reducing corporate tax rates over the last few years. Even China, the world's most populous nation, and once a bastion of communism, now has a corporate tax rate of only 25 percent, some 14 percent below U.S. rates.

"It's partly the reason why we have had a shrinkage, relatively speaking, in the manufacturing sector that everyone is moaning and groaning about and blaming the foreigners for," said Stephen Entin, president and executive director of the Institute for Research on the Economics of Taxation.  "We're doing it to ourselves."

The last corporate tax reduction in the U.S. was under Ronald Reagan:

Entin said China reduced the taxes on saving, investment and capital formation in order to help lift a billion people out of poverty, and it worked. The country has no tax on bank interest, no tax on capital gains, and no taxes on stocks listed on its stock exchange.

"They're growing very, very nicely in spite of the world financial panic," he said.

In the last quarter, China grew at 8.9 percent, 7 percent in the quarter before that -- about three times the U.S. rate.

"This is not to say that China doesn't have big state enterprises that they need to pare back.and do other reforms, but they are certainly making some progress on the tax front," he said.

When President Obama gathers corporate and union heads and academics to his jobs forum this week, that may be an observation made.

Investors need an environment that's understandable, not one that's gonna change in a random fashion every couple of years," said Gale, who cited alternating administrations over the past 50 years for schizophrenia on corporate tax policy.

Fox News' Jim Angle contributed to this report.