In a recent speech before the Business Roundtable, an association of top business leaders from the nation’s largest corporations, President Obama addressed a variety of issues, including the critical matter of tax policy. To his credit, he acknowledged there is a “deal to be done” when it comes to corporate tax reform.
But as we’ve often noted, it is important that any deal with the new Congress involve comprehensive reform, rather than just a series of short-term fixes.
At a rate exceeding 39%, American companies are subject to the highest corporate income tax in the developed world, far higher than the developed nation average rate of 25%. On top of that, our firms face the burden of being taxed twice on profits earned overseas. Whereas every company in the world pays tax in the nation where it earns profits, American companies are then subject to an additional domestic tax on those profits when repatriated. That punitive process, known as our “worldwide tax regime,” is practiced by virtually no other country on Earth.
And unfortunately, what we’ve done in the past to address the problem is akin to treating a bullet wound exclusively with painkillers. In other words, we’ve addressed the symptoms, but not the problem.
For example, recall the Treasury Department’s counterproductive decision earlier this fall on the issue of corporate tax inversions, imposing punitive new rules. Corporate tax inversions constitute a perfectly logical response to the flawed system under which our economy’s biggest drivers are forced to work – one that is outdated and anti-competitive. The Treasury Department’s new inversion rules will only serve to hamper American firms already disadvantaged by our sky-high domestic tax rates, they will drive even more companies and employers abroad and they will retroactively punish them for making sound, logical, completely legal business decisions. Additionally, they threaten job growth in some of our most important sectors, as American firms become less competitive globally.
As another example, Obama in his post-election comments expressed support for a corporate tax holiday. Such a corporate tax holiday – or repatriation – would allow companies with profits overseas to bring them back to the United States at a reduced tax rate. His underlying motive wasn’t common-sense reform so much as the belief that the revenues could then be used for federal infrastructure spending. But as a Congressional committee report found, tax holidays did not achieve that end, as confirmed by the experience of a previous tax holiday in 2004.
As these illustrations make painfully obvious, the bottom line is that our policymakers fail to understand the broader problem that hinders America’s economic growth and global tax competitiveness.
Fortunately, with the new Congress we now possess an excellent opportunity to make real progress, an opportunity to enact broader tax reform. With a more simplified and competitive corporate tax code, we would add roughly 540,000 jobs and increase our national gross domestic product by $92 billion through 2032, according to a Heritage Foundation Report. In addition, not only would we remove the obstacles that currently drive American companies (and the jobs they create) abroad along with their profits, but we would make the United States an even more attractive place for companies all over the globe to relocate and invest.
Finally, it should be noted that this is not an issue constrained by traditional political divisions, a typical divide between the left and the right. Rather, it’s an issue that offers the opportunity for bipartisan and commonsense reform. Accordingly, there’s no excuse not to finally get it done, thereby improving our economy, boosting jobs and making our code competitive with the rest of the world at long last.