Monday, April 02, 2012Commentary by U.S. Sen. Rob Portman, R-Ohio.
WASHINGTON -- Sunday was April Fool’s Day, and unfortunately, it was no April Fool’s joke that America will become No. 1 in the world in a category you don’t want to be in.
On April 1, the United States became the country with the highest corporate tax rate in the developed world, as Japan lowers its tax. America’s combined 39.2% federal and state corporate tax burden far exceeds the 25% average among our leading global competitors.
At a time when over 20 million Americans are out of work or underemployed, it is particularly frustrating that we are losing ground to other nations that are vying for the same new jobs and investment.
And it’s American workers who are paying the price for this anti-competitive tax climate. The nonpartisan Congressional Budget Office reports that workers shoulder 70% or more of the corporate tax burden in the long run. Both wages and job creation suffer as a result of our high rate. According to a recent study in the Journal of Public Economics, for example, reducing the corporate tax rate by 10 percentage points could increase the economic growth rate by 1-2 percentage points — which could mean about a million new jobs per year.
America hasn’t always been a high-tax country. In 1986, President Reagan and Congress cut the corporate rate from 46% to 34% — which deliberately put us at a rate below most of our trading partners at the time to attract investment and jobs.
But over the past 25 years, fierce competition to attract investment and jobs has led every one of our major foreign competitors to cut its corporate rate. Every country but the U.S.
Instead of cutting rates, the federal government has encrusted the tax code with a complex maze of preferences and carve-outs — producing a narrower tax base and a less efficient system.
Here’s the good news: the problem of too many tax breaks and a high rate of tax are actually complementary. Corporate tax reform can kill two birds with one stone. By eliminating costly tax breaks, we can reduce the corporate rate without adding a dime to the deficit. In fact, if done right, pro-growth tax reform will actually increase revenues to federal coffers by spurring growth, job creation, and bigger tax receipts.
That is why some of us in Congress are working to craft a bipartisan legislative proposal to overhaul the corporate tax code — a key component of fundamental tax reform that must ultimately address both the business and individual tax code.
Our plan would bring the top rate down from 35% to 25% on a revenue-neutral basis. This will require some difficult trade-offs because of the need to reduce tax preferences to lower the rate that much. But as economists across the board seem to agree, eliminating tax preferences will produce a more efficient tax code where decisions will be based on business reasons, not Washington direction. It helps ensure that businesses succeed based on the quality and value of their goods and services — not the sophistication of their tax planning or the amount they spend each year on D.C. lobbyists. And by closing special-interest loopholes, tax reform will ensure that all corporations pay their fair share.
Beyond moving to a lower rate and more efficient code, our proposal will also tackle a third major competitive disadvantage: the IRS’s outdated approach to international operations of American employers, which we have not really modernized since the 1960s. With over 80% of the world’s purchasing power now beyond our borders, we can no longer afford a corporate tax system that makes it harder for U.S. businesses and workers to sell in foreign markets.
America is one of very few developed countries that still taxes businesses on what’s called a worldwide basis. And we do it in a way that actually discourages U.S. businesses from reinvesting the profits they earn overseas back here at home. The IRS today gives firms a choice between keeping their earnings abroad tax free permanently — or paying a steep tax bill if and when they choose to bring their money home. We want these dollars invested here.
The tax on bringing foreign earnings back — also called repatriation — creates a “lockout effect” that has trapped an estimated $1.4 trillion or more in foreign earnings overseas. That translates directly into foregone U.S. jobs and investment.
The solution is moving to a so-called territorial tax system to enable American employers to compete on a level playing field internationally. This means the United States would tax business income earned here and stop penalizing American employers from reinvesting overseas profits back home. That approach is simpler and it’s what the vast majority of our competitors now do.
We know from studies and common sense that the expansion of American employers into foreign markets results in more jobs here: jobs in research and development to design the products sold in the international marketplace; jobs at headquarters to support and supervise foreign operations; and job-creating direct investment in American businesses. We want that market share overseas because it directly helps create jobs here at home.
There is a growing consensus that our corporate tax code is forcing U.S. employers and workers to compete with one hand tied behind their backs. Through fundamental tax reform, we can pave the way to a genuine and lasting American jobs recovery.
SOURCE: U.S. Sen. Rob Portman (R-Ohio)
Published by The Business Journal, Youngstown, Ohio.