America was challenged on taxes and Trump answered the call

A half-century ago, in 1967, a Frenchman named Jean-Jacques Servan-Schreiber published Le Défi Américain (“The American Challenge”). Surveying U.S. economic dominance, Servan-Schreiber described his book as “a call to action” — action to rejuvenate French economic power. Indeed, he called upon his country to “counterattack.”

Servan-Schreiber was writing when the U.S. accounted for a full 37 percent of the world’s economy. Moreover, 17 of the 20 largest companies in the world were American.  

Servan-Schreiber’s book was hugely impactful, not only in France, but across Europe. In the words of the German-born Klaus Schwab, founder of the World Economic Forum, “’The American Challenge’ was not only a game changer for European–American relations, it also provided a new and innovative conception of national competitiveness.” 

Europe’s response to Servan-Schreiber’s book took several forms. One response was a heightened emphasis on “national champion” companies — big firms that could go head-to-head with American corporate titans. 

A second response to the American Challenge was the expansion of what is now known as the European Union (EU).  In the two decades after 1967, the European confederation doubled its nation-state membership, and in the decades since, it has more than doubled again. 

To be sure, many Americans are skeptical about European ideas of “national champions” and continental consolidation. Yet for now at least, Europe boasts a GDP larger than that of the U.S., and the EU routinely uses its collective clout to help its job-creating champion companies.

So now we come to a third element in Europe’s response to the American Challenge. Here there should be less ambivalence, because the results have been so clear-cut: In the last few decades, European countries have taken up a strongly competitive approach to taxation, especially corporate taxation — and that strategy has paid off for them.  

Ironically, the European country that kicked off the corporate-tax response to the American Challenge was the country closest to the U.S., the United Kingdom.  Back in 1979, when Margaret Thatcher took over the prime ministership of her country, Britain was at a low ebb. Indeed, it was often called “the sick man of Europe.” 

In that era, a key symptom of British sickness was too-high taxation. The corporate tax rate, for example, stood at a prohibitive 52 percent. Thatcher steadily reduced that rate. By the time she left office in 1990, it had been cut to 33 percent.  

As everyone now knows, in the decades since, the British economy has continued to prosper. Not coincidentally, the U.K. corporate tax rate is now just 19 percent; over the last four decades, that’s a rate-reduction of almost two-thirds. 

In the meantime, other European countries have acted even more boldly. In the early 80s, Ireland’s corporate tax rate was a debilitating 50 percent. Yet today, Ireland’s rate is down to 12.5 percent — a three-quarters reduction in the last four decades. Ireland, once an economic backwater, is now the roaring “Celtic Tiger.”  

For its part, back in the 1980s, the U.S., too, was eager to be a part of the international competition. In 1986, President Ronald Reagan signed into law a substantial cut in the U.S. corporate rate, from 46 percent to 34 percent.   

Yet after that, the U.S. seemingly went to sleep on the issue of corporate competitiveness, even as the rest of the world stayed wide awake. According to the Tax Foundation, in the three decades after 1986, every other member of the Organization for Economic Cooperation and Development (OECD) — the “club” of most leading economies — cut its corporate rate. 

Whereas in the 1980s, most European corporate rates had been up in the 40s or even 50s, by 2017, that OECD average had gone down to 24.7 percent. In the meantime, the U.S. went in the reverse direction: In 1993, the corporate tax rate actually went up by a point, to 35 percent.  

So we can see: By the 2010s, the U.S. corporate rate was ten or more points higher than that of most of its rivals.  And that uncompetitive rate was one factor in the relative eclipse of the U.S. economy in the world arena. 

By 2017, the U.S. share of the world economy had shrunk to less than 25 percent, and our share of the world’s largest corporations had shrunk as well, from 85 percent of the world’s top 20 companies to just 45 percent.   

It was in this challenging environment that the RATE (Reforming America’s Taxes Equitably) Coalition, of which this author is a part, came into existence in 2011. Its member corporations and associations were suffering from America’s antiquated 35 percent corporate rate, and they resolved to see it lowered. 

In the years that followed, RATE was proud to join with many others, across all sectors of American society, in a rising tide of pro-competitive activism. As we all know, on Dec. 22, President Trump signed the Tax Cuts and Jobs Act into law. As he said at the time, “More products will be made in the USA … We’re going to bring back our companies.”  

The president was right: American competitiveness is back, big and strong; and the Europeans know it. For instance, the Centre for European Economic Research, based in Mannheim, Germany, recently acknowledged that, thanks to the tax bill, the U.S. now has a new edge:

“Competition between EU Member States for US investment is also going to intensify … We can expect to see German companies increase their investment in the U.S. by around a quarter after the reform.” 

Of course, America isn’t just competing with Germany, or the EU. Today, we must compete with the whole world. Yet now, finally, in 2018, five decades after Servan-Schreiber’s influential book, the U.S. has regained its preeminence in tax competition.