By: Larry Burton Issue: Innovation, Growth, Job Creation Section: Business
Critical to American Jobs and Competitiveness
There’s a lot of talk in Washington, D.C. about how to get our economy moving again. Some talk about making our workforce more competitive, promoting trade or reforming and removing regulatory burdens that prevent businesses from expanding and hiring more workers. All of these are good ideas that should be pursued by policymakers.
But today I want to discuss another policy area that has been in serious need of reform for years – the U.S. corporate tax system.
There’s widespread recognition that our tax system is one of the most outdated and anti-competitive in the developed world. It’s true, and it’s a major problem for America’s competitiveness, which is critical for U.S. job creation. American multinational companies are responsible for 63 million American jobs and must be able to compete on a level playing field with non-U.S. companies.
Yet, America has one of the highest statutory corporate tax rates in the world at 39.2 percent (inclusive of federal and state taxes), fully 14 points higher than the average of our competitors in the Organisation for Economic Cooperation and Development (OECD). We are also the only G-7 country that taxes businesses on foreign earnings when they’re brought home, which is effectively a double-tax not faced by most of our competitors. Nearly every other developed nation employs a “territorial” system that exempts these active earnings from domestic taxation. Even our research and development (R&D) tax credit, once the envy of the world, has fallen way behind the incentives offered by our competitors. By 2009, the competitiveness of our R&D tax incentives ranked just 24th out of 38 OECD and advanced emerging countries.
Collectively, our tax system makes us an outlier among developed nations, putting U.S. companies at a severe competitive disadvantage abroad and hindering their ability to invest and create jobs at home. And with unemployment still painfully high, a tax overhaul is needed now more than ever.
Even so, there remains a lot of discussion questioning if American businesses pay their fair share. Some contend that, while our statutory corporate rate may be high, the effective rate – the average amount U.S. companies actually pay on their tax returns – is low. Not so.
Business Roundtable recently commissioned PwC (PricewaterhouseCoopers LLP) to conduct a study examining the global effective corporate tax rates reported by U.S. and foreign-headquartered companies on their financial statements. And what that study found was striking. Among the world’s 2,000 largest businesses, U.S.-headquartered companies faced an average effective tax rate of 27.7 percent over the 2006-2009 period, compared to an average of just 19.5 percent for their foreign-headquartered competitors. That gives us the sixth highest effective rate among all 59 countries included in the survey.
There is no doubt that fixing the outdated and complex tax code is a monumental undertaking. But federal politicians need only look at states and other countries to understand where to begin.
The international trend is overwhelmingly for lower corporate taxes. Canada recently announced plans to further reduce its federal rate to 15 percent, cutting it nearly in half since 2000. Even while reducing spending and raising other revenue to reduce a huge deficit, Britain recently announced a new round of planned corporate tax cuts. Ireland, which has cut deeply and raised taxes to resolve its fiscal crisis, has refused to budge on one thing – its 12.5 percent corporate rate.
Likewise, at the state level, many governors are moving ahead to reform and reduce business taxes. Just as with countries, states compete against one another to serve as headquarters for businesses and to encourage commerce in their locales. Bringing down state business taxes is especially important for competitiveness given that Nevada, South Dakota, Texas, Washington and Wyoming have no corporate income tax at all. The trend – globally and locally – is clear. While Washington, D.C. hasn’t made a serious attempt at reform since 1986, states and other nations are taking important steps to create the best possible environment to keep local businesses, attract new ones, and spur job growth.
But let’s make no mistake – fiscal policies are complicated and making tough choices can be politically risky. In March, Canadian Prime Minister Stephen Harper chose to let his government be defeated in Parliament rather than budge on his 15 percent tax plan. Forced out by the opposition, he took the issue directly to Canadians in one of the only recent national elections featuring corporate taxation, among other issues, as a significant theme – and sure to be a losing one, in the opinion of most pundits.
Yet, on May 2, in a result that should hearten advocates of competitive tax policy, Harper led his party to a resounding – and largely unexpected – majority win.
British Prime Minister David Cameron’s party generally outperformed expectations in the U.K’s May midterm elections. And in Ireland, a newly elected government has pledged to defend the 12.5 rate just as aggressively as the one it replaced.
Sometimes simply doing “what’s right” can be politically advantageous in addition to just making sense. In these countries, citizens were willing to reward policymakers who made the tough choices necessary to promote jobs and prosperity – even on something as seemingly politically perilous as reducing corporate taxes. In the U.S., there is wide agreement that our tax system is flawed. It is encouraging that Administration officials and congressional leaders are working to address this problem. But it’s still far from certain that we will see effective reform this year. That’s a problem.
We are still emerging from the worst recession in decades, and there is much more economic ground to make up. Unemployment remains high at around nine percent and our GDP growth rate in the first quarter of 2011 was just 1.8 percent. In order for us to achieve true recovery, economists agree that our economy should be expanding at a rate of at least three percent and creating more than 300,000 jobs each month. Serious pro-growth policies – such as meaningful corporate tax reform – are needed to give American businesses the confidence to invest and hire, helping move these numbers up to where they need to be.
For America’s workers and families, further delay and inaction is simply unacceptable. Congress and the President must work together to enact serious reform that lowers the U.S. corporate rate and adopts a competitive “territorial” system, like the rest of the world, that does not impose a tax on foreign earnings brought back home. Otherwise, America will see its competitive position erode and with it, more American jobs.
Larry Burton is Executive Director of Business Roundtable, an association of CEOs of leading American companies with nearly $6 trillion in annual revenues and more than 13 million employees.