Freedom Line Blog

Regardless of today’s election outcome, here’s an encouraging headline buried deep on Page C 8 of this morning’s Wall Street Journal:  “Tax Relief Is Likely No Matter Who Wins.”

As we at CFIF have long emphasized, the U.S. continues to suffer the developed world’s highest corporate tax rate.  In addition to suffocating domestic growth and imposing needless tax complexity on American businesses, our outdated corporate tax code also explains why corporations are forced to relocate headquarters overseas in order to survive in an increasingly competitive global marketplace.  Speaker Paul Ryan has unsurprisingly offered admirable intellectual and political leadership in promoting reform, and the good news is that oven liberals like Barack Obama understand the need for cutting rates and reducing complexity.

Accordingly, it’s refreshing regardless of one’s political leanings to read the Journal’s take:

No matter the outcome of Tuesday’s election, American companies with substantial overseas earnings, and their investors, could emerge as big winners.  Corporate tax reform that would make it easier for U.S. firms to repatriate foreign earnings has emerged as a rare issue of bipartisan consensus in Washington.  Progress on this issue is possible no matter who controls the White House and Congress next year…  Under current law, American companies with overseas earnings pay no U.S. federal tax on these profits unless and until they repatriate the money, at which time they pay the relatively high corporate tax rate of 35%.  This creates a perverse incentive for U.S. companies to house money abroad rather than reinvest it at home…

Even in a divided-government scenario, for example, with Mrs. Clinton as President and a Republican-controlled Congress, it seems likely that companies can look forward to a one-time break on repatriated earnings and a lower tax rate going forward.”

And as the Journal notes, the positive effect would likely be substantial:

The last time there was such a repatriation tax holiday was in a law passed in 2004, and the effects were dramatic.  Companies brought home $299 billion of overseas earnings in 2005, up from $82 billion the previous year, according to the Bureau of Economic Analysis.”

Far preferable to a mere one-time repatriation tax holiday would be a permanent reduction in the corporate tax rate below the developed worldwide average around 20%, and removal of Byzantine complexity.  Regardless, the likelihood of tax reform whoever wins tonight offers welcome news as an oftentimes bleak election concludes.

Corporate inversions aren’t the problem, they’re the symptom.  The problem, as Mercatus Ceneter’s Veronique de Rugy explains, is that “America’s corporate income tax rate is the highest of all developed nations.”

High U.S. Corporate Tax Rate

As de Rugy correctly concludes, “Addressing the underlying causes of inversions by reforming this tax system would not only stop inversions, it would also trim the burden on corporations, which would in turn help American companies compete better at home and abroad.”

Inexplicably, the U.S. stubbornly maintains the developed world’s highest corporate tax rate.  We also hold the inglorious distinction of taxing income earned overseas a second time, even after taxes were already paid in the nations where it was earned.  Obviously, that only incentivize businesses to leave America for more hospitable foreign shores and take jobs with them.

A simple illustration courtesy of The Wall Street Journal drives home the point:

The U.S. system of worldwide taxation means that a company that moves from Dublin, Ohio to Dublin, Ireland, will pay a rate that is less than a third of America’s.  A dollar of profit earned on the Emerald Isle by an Irish-based company becomes 87.5 cents after taxes, which it can then invest in Ireland or the U.S. or somewhere else.  But if the company stays in Ohio and makes the same buck in Ireland, the after-tax return drops to 65 cents or less if the money is invested in America.”

When people wonder why over seven years of economic “recovery” doesn’t feel like a recovery at all, this is a leading reason.  Our unsustainably high rate and double-taxation regime is simply unacceptable, but the good news is that the coalition favoring reform is bipartisan.  That’s an encouraging sign regardless of who wins in November, but it’s time to finally get this done before even more businesses and jobs move overseas.

April 1 marked an important milestone in America.  Not because it was April Fools’ Day, but because it marked the second anniversary of the United States claiming the inglorious title of the developed world’s highest corporate tax rate.

The U.S. hasn’t achieved comprehensive tax reform since 1986.  Ronald Reagan was early in his second term as President, Michael Jordan was still five years away from his first NBA title and Pixar animation studios first opened.  Over the ensuing three decades, however, our international trading partners and competitors have accomplished reform, particularly in their corporate tax codes.  As a result, America’s 39% rate unfortunately stands as the world’s highest.

Americans can rightfully claim, “We’re number one” in many areas, but it’s simply unacceptable that the highest corporate tax rate remains one of them.  It constitutes a continuing drag on business growth, job creation and wage increases.  And as yet another disappointing jobs report today confirms, we cannot afford to maintain the status quo.  Numerous studies show that a lower corporate tax rate creates jobs and economic growth, so we must shift our current strategy away from government bailouts, welfare and unemployment checks, and more toward restructuring the tax code and empowering the private sector to hire.  Our world becomes increasingly interconnected each day, and we simply cannot cede competitiveness to other nations whose tax codes are far more appealing to new businesses.  The U.S. spent the 20^th century building an economy that was the strongest and most powerful in the world, but lack of action on tax reform jeopardizes that global standing.

Moreover, this isn’t a partisan issue.  Republicans and Democrats, including Barack Obama himself, agree that it has been too long since we have undertaken comprehensive tax reform.  Accordingly, there’s no excuse for further delay.

Let’s not let another three decades pass us by without corporate tax reform.  Let’s instead achieve a code that actually encourages businesses to grow and hire workers.

There is no better example of Washington’s dysfunction than the U.S. tax code.  With President Obama’s annual State of the Union Address less than two weeks away, discussion about how to fix our broken tax code is growing.  In particular, the House Ways & Means Committee released a video this week highlighting its problems, and some proposals about how to fix it.

WATCH THE VIDEO: https://www.youtube.com/watch?v=BGizlBE-u10&feature=youtu.be

The last time America’s tax code was overhauled was in 1986, under President Ronald Reagan.  Obviously, very much has changed since then, from the dot-com boom-and-bust, the rise of China as an economic powerhouse and the sub-prime mortgage crisis, just to name a few.  What’s more, the tax code continues to grow more complicated with each passing day.   According to House Ways & Means Committee research, more than 4,400 changes to the tax code have occurred in the last 10 years, amounting to about one change per day.  While other countries have been simplifying their codes and reducing rates, America’s tax burden continues to grow in scope and complexity.

While the fleeting political will do something still exists – even President Obama himself proclaimed, “Our corporate tax rate is too high” – action is urgently required.  The best solution is one that makes America more competitive globally and leads to economic growth.  America’s corporate tax rate currently stands at 35% – the highest in the world.  Accordingly, a proposal to lower that corporate rate, while broadening the base, will result in a simpler, fairer tax code that both sides of Congress can get behind.

In today’s Wall Street Journal, former Japanese Diet member Mieko Nakabayashi and former U.S. Deputy Assistant Secretary of the Treasury James Carter spell out in stark terms the need for reform and reduction of U.S. corporate taxes, now the highest in the industrialized world.  In particular, they highlight the alarming exodus of large corporations from America to more hospitable tax regimes with this statistic:

When the U.S. last cut its corporate tax rate in 1986, 218 of the world’s 500 largest corporations measured by revenue were in the U.S.  Today, that number is 137.  Similarly, the number of Japanese corporations in the Fortune Global 500 fell to 68 last year from 81 in 2005.  While there is no single explanation for the drop, Tax Foundation chief economist William McBride tells us:  ‘The common thread behind all of this is the U.S. corporate tax, which is the most punitive in the developed world.’”

We live in a period of unprecedented political polarization.  The need to reduce our corporate rate, however, has actually achieved bipartisan agreement, with Barack Obama himself proclaiming the rate too high.  Accordingly, the time is now to enact reduction and reform, lest America’s legacy of economic leadership deteriorate further.

In an interview with CFIF, James Pinkerton, co-chair of RATE (Reforming America’s Taxes Equitably), Fox News contributor and former White House domestic policy adviser, discusses the need to lower the U.S. corporate tax rate to enable American companies to compete in the global marketplace and jumpstart U.S. economic and job growth.

Listen to the interview here.