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New Tax Analysis Totally Off

Critics of a competitive market-based or territorial tax system are latching onto a study out today by NerdWallet -- a personal finance website that features recommendations on things like credit card rates and gas prices -- as the latest “evidence” that corporate tax reform really isn’t necessary.

The study claims that ten of America’s top economic champions -- including Apple, IBM, and Microsoft -- paid an average corporate income tax rate of 9 percent last year.  That “fact,” according to some, belies any need for corporate tax reform.  But the data are completely off, and lose sight of the bigger issue, namely, the ability of the United States to compete effectively for new jobs and investments with our biggest global economic rivals.

The irrefutable truth is that the United States has the single largest corporate tax rate in the world, and that high rate puts the U.S. at a marked disadvantage to every single one of our global economic competitors.   It is no secret that tax policy is a major driver of a company’s decision where to locate the next factory or facility, and the jobs that accompany it.  It is simple logic:  the lower the tax rate, the easier it is to attract new jobs and investments.

This is exactly the argument that President Obama’s Council on Jobs and Competitiveness echoed earlier this year when they urged a simpler, more competitive tax system:

“[T]he U.S. should shift to a territorial system of taxation in order to make America more competitive in global markets.  While most other developed nations have adopted territorial systems that exempt most or all foreign income from taxes when they are repatriated, the U.S. subjects all worldwide earnings to the corporate income tax when they are brought home to the U.S.  This approach actually encourages U.S. companies to keep their earnings abroad rather than investing them here at home.  Adopting a territorial tax system would bring us in line with our trading partners and would eliminate the so-called “lock-out” effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of American companies in the U.S.”

What detractors fail to recognize is that there is a fierce race underway for global competitive innovation advantage, and America is falling behind.  Nations around the world understand that their tax codes are among the most valuable tools they have to win that race and bring jobs and investments to their countries.  They know that higher corporate taxes reduce business start-ups and cut into investments in factories and facilities that put people to work.  As the Information Technology & Innovation Foundation has noted, corporate tax rates in the last 30 years for OECD nations and China  have declined from nearly 50 percent to levels less than half that.  But the United States is not following suit.

Tech is a success story that is driving transformative innovation around the world and putting millions of people to work here in America.  Unfortunately, tech’s success pales in comparison to our potential, and our nation’s tax policies are holding us back.  It’s time to focus on how best to shape a smart, competitive market-based tax system that also lowers the rate and sparks new innovation.  Those three components are central to an effective corporate tax policy that will help to encourage more investments and new jobs here at home.

Public Policy Tags: Tax Policy