Prior to participating in a discussion with employees at Intel Corporation in Santa Clara, Calif., House Ways & Means Chairman Dave Camp and Senate Finance Chairman Max Baucus were given a brief tour of the Intel Museum. Among the many innovations created by this iconic company was the 386 microprocessor, a 32-bit chip that made it possible for personal computers to run more than one software application at the same time, providing multitasking capability and, along with it, the foundation for the Windows 3.0 operating system.
Released in 1985, the 386 was an important milestone in advancing the U.S. information technology industry, but, like so many cutting edge innovations, it became obsolete. It was replaced by faster, more complex processors that stimulated further innovation.
When it comes to maintaining a competitive edge, the U.S. Congress could learn from dynamic technology companies like Intel. At the same time Intel was launching the 386, Congress was passing what would be the last major re-write of our U.S. tax code.
Like the 386, the 1986 tax reform law was a major innovation and a catalyst for significant economic activity. One of its key achievements was a significant reduction in the corporate rate – from 46 percent to 34 percent (it was adjusted to 35 percent as part of the 1993 deficit reduction deal), one of the lowest corporate tax rates in the world at the time. And just as Intel’s business competitors reacted with innovations to counter the 386, America’s global competitors modernized their tax codes, lowering their corporate tax rates and making the U.S. code increasingly obsolete.
This massive global competition for investment and jobs was a recurring theme in Chairmen Baucus’ and Camp’s conversations with Intel employees. Chairman Baucus noted that other countries have lowered their corporate rates in order to gain an edge in job creation and to make their domestic companies more competitive in global markets. He and Chairman Camp both agreed that reducing the corporate tax rate has to be the centerpiece of any broad-based reform of the code.
One Intel employee asked the lawmakers if they supported making the U.S. tax code reflect the market-based systems most developed countries have adopted. Both chairmen agreed, stating that a modern tax system must be market-based if U.S. companies are to compete with foreign companies that are already benefitting from similar systems. Chairman Camp noted that, unlike most of their foreign competitors, American companies are subject to taxation twice on their foreign profits – first in the country where they are earned and then again in the United States.
This potential for two large tax bills is part of the reason why an estimated $1.7 trillion in U.S. corporate earnings remain locked overseas. Chairman Camp believes tax reform is imperative if Congress wants to encourage these trapped earnings to be invested in the U.S. The longer it takes for Congress to enact tax reform, he argues, the greater the risk U.S. companies will invest that money overseas.
Intel’s innovators emphasized the importance of preserving effective tax incentives, and specifically highlighted the research-and-development (R&D) credit. Intel Chief Financial Officer Stacy Smith pointed out that Intel invested $10 billion in domestic R&D, more than any U.S. publicly traded company.
The R&D credit is a key reason why companies like Intel do a majority of their R&D work in the U.S., even though they sell more of their goods and services outside the U.S. Chairman Baucus agreed that the R&D credit has been an important incentive that needs to also be modernized in order to keep pace with investment incentives offered by other countries.
Just as a computer with a 386 chip as its central processing unit would be today an information technology outlier, an economy with the 1986 tax code as its central policy unit is an economic growth outlier. Fortunately, Chairmen Camp and Baucus received a reaffirmation of that point of view from Intel’s innovators. The chairmen encouraged those assembled to get involved, make their views known, and to help them innovate on tax policy as Intel has done with information technology.