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Political Paralysis Is the Biggest Threat to U.S. Competitiveness

A broken tax system is seen as evidence Republicans and Democrats can’t get anything done.

The U.S. political system is America’s “single biggest barrier to competitiveness,” according to an annual study by Harvard Business School.

“Many Americans are keenly aware that the system is broken, but are unsure why it is broken or how to fix it,” says the new study, released late Wednesday [pdf]. It finds that the U.S. is in “an era of political paralysis” and says “the federal government has made no meaningful progress on the critical policy steps to restore U.S. competitiveness in the last decade or more.”

The authors attribute American uncertainty over what to do to “divisive and partisan” dialogue, which “has confused the public on many issues.”

The study, entitled Problems Unsolved and a Nation Divided, is by Harvard Business School professors Michael Porter, Jan Rivkin, and Mihir Desai, with Manjari Raman, who is director of the school’s U.S. Competitiveness Project. Desai, a tax expert, said in an interview that self-destructive tax policy is one effect of the political paralysis.

While Republicans and Democrats disagree over what to do about the corporate tax rate, U.S. companies are rushing to move operations abroad or to be bought by foreign companies to shield their profits from U.S. taxes. In the U.S., many are converting themselves or parts of themselves into “pass-through” entities, such as investment trusts and partnerships, that aren’t subject to the corporate income tax. 

“More than half of business income is happening through pass-throughs. It’s not just mom and pop,” Desai said. 

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