Corporate Tax Reform Needed

Background

High corporate rates are a burden on investors, consumers and workers, and furthermore discourage U.S. corporations from creating American jobs. Following the Tax Reform Act of 1986, the U.S. for a time had a low corporate tax rate compared to other developed nations. But other nations quickly caught on to the fact that low corporate tax rates are necessary for economic growth, and have since been cutting their rates. The U.S. has simply failed to keep up.

Today, the U.S., when combining state and federal taxes, has the second highest statutory corporate tax rate among OECD nations. The highest rate is held by Japan, which has pledged to reduce their rate by 5%, thus leaving the U.S. soon to hold the dubious distinction of having the highest level of destructive corporate taxation. Although this is bad news, the statutory rate does not tell the entire picture. Effective marginal tax rates take into account rules for depreciation and additional features of the tax code that influence where corporations choose to invest.

A 2005 study by the Congressional Joint Committee on Taxation concluded that a reduction in the corporate income tax had the greatest impact on increasing long-term economic growth due to increased capital investment and labor productivity. We can no longer deny that capital is mobile. However, a workforce generally is not. Manufacturing in particular is capital intensive, so a higher corporate tax rate results in less investment in not only our facilities but also in our workforce.

President Obama’s Economic Recovery Advisory Board estimated in their report "The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation”, the total compliance costs for U.S. companies at $40 billion annually, or more than 12 percent of the revenues collected.

"There's no question about it — we have so much fat in the tax code that we cannot only reduce it dramatically, but we can get rid of the fact that we are the highest corporate taxed country, at least the next highest in the world," Rangel, the former chairman of tax-writing Ways and Means Committee.

"We can reduce it 35 percent to 28 percent with not much effort," he added. "but those corporations that enjoy preferential treatment will no longer get it." Instead, "everyone gets a fair tax rate across the board."

The Cato Institute’s Dan Mitchell noted that the U.S. corporate tax rate of nearly 40 percent (including state corporate burdens) already is far too high, particularly since America adds to the competitive disadvantage of U.S.-domiciled firms by being one of the few nations to impose an extra layer of tax on foreign-source income. Japan’s proposed rate reduction, however, means the high tax rate in America will be an even bigger hindrance to job creation.  It’s also worth noting that the average corporate tax rate in Europe has now dropped to less than 24 percent, so even welfare states have figured out that a high tax burden on business doesn’t make sense in a competitive global economy.

Gary Clyde Hufbauer of the Peterson Institute for International Economics Washington, DC testified before the Ways & Means committee that "I am often asked, ‘If US corporate tax rates are so high, why are corporate tax payments so modest?’ In a good year – for example, 2007 – US corporate tax payments (federal and state combined) were 3.0 percent of US GDP, compared with the OECD average of 3.9 percent. The main reason is that the US corporate tax base is far smaller than the OECD average: 13 percent of GDP compared to 22 percent. The difference is partly explained by the dazzling array of US pass-through firms which skip the corporate tax system. Large firms which have a choice – everything else being equal – would often rather invest and produce elsewhere and ship their goods and services to the US market. Our corporate tax system does a good job at encouraging the best and brightest firms to invest abroad. It does an even better job at discouraging tomorrow’s global 1000 corporations from locating their headquarters in the United States."

A search of house.gov website will find an amazing number of testimonies regarding the destructive nature of the United States Federal and State Corporate tax rates.

An example of the arrogance -Representative Pete Stark, a California Democrat, referred to the report at the hearing and asked Boeing’s Zrust by how much tax rates should be dropped. Zrust didn’t specify a rate. He said Boeing’s tax bill is poised to rise in the next three years because the company won’t be able to claim as many deductions for airplanes that are on track for delivery.

Stark remained skeptical. “Oh yeah?” Stark said. “How much more do you think Boeing is going to pay us?”

Solutions

U.S. Representative Richard Hanna (R,C,I-NY) introduced his first piece of legislation, H.R. 609 the American Competitiveness Act, to cut the corporate tax rate in an effort to promote American growth.

“This bill is simple, but it sends a powerful message to corporations around the world that the United States won’t stand by idly while our finest corporations export jobs,” Hanna said. “The American people need to know we’re focused on growing our economy and putting people back to work. Our high corporate tax rate forces away investment and the jobs that come with it. It makes it increasingly difficult for American corporations to stay here and still compete in the global marketplace.”

Rep. Tim Scott has introduced H.R. 937, the Rising Tides Act of 2011, which would significantly lower federal corporate tax rates. American corporations are currently burdened by a 35% federal tax rate – the second highest in the developed world. Making matters worse, American companies doing business abroad must pay U.S. taxes in addition to local taxes, a double tax burden that puts them at an unfair disadvantage. H.R. 937 reduces corporate tax rates to 23% and allows for permanent repatriation of overseas profits, with a goal of heading towards a territorial system of taxation.

Both of the above mentioned bills are in the House Committee on Ways & Means.

Executives from four large U.S. companies told lawmakers that they would give up lucrative tax breaks in exchange for significantly lowering the 35% corporate rate, spurring efforts to overhaul the tax code.

Executives from Boeing Co., Sears Holding Management Corp., Emerson Electric Co. and Perrigo Co., a leading pharmaceutical manufacturer, said Thursday that they prefer the simplicity and certainty of a rate as low as 25% over the complexity of calculating frequently shifting tax breaks.

"We would be willing to take a rate reduction and in return give up the R&D credit, given the way its presently structured," James Zrust, vice president of tax for Boeing, told the House Ways and Means Committee.

These bills need to be out of committee, combined and voted on. The proposed cuts in corporate taxes and the previously mentioned proposals to curtail overarching regulations are two major steps in bringing new jobs back to the Unites States. Let your congressperson know how you want to be represented.