The San Francisco Chronicle recently editorialized against replacing America’s antiquated tax system with a modern, competitive, market-based approach. The shift would place a premium on job creation and encourage companies to invest more of their foreign earnings here at home.
In Wednesday’s edition, I respond to the editorial, underscoring the importance of this new approach not only to U.S. businesses but also to American workers and communities seeking new opportunities for economic growth.
Say No to the Tax Status Quo
Published in The San Francisco Chronicle, January 2, 2013
By Dean C. Garfield, ITI President & CEO
San Francisco is a city with an endemic dynamism enhanced by a tradition of embracing creative disruption. Given the city’s cultural connection to change, it was surprising to read The Chronicle’s Dec. 15 editorial, “Say no to territorial tax for U.S. corporations.” The editorial argued for a failing status quo when creative disruption in tax policy is necessary. San Francisco, unlike The Chronicle, knows we can do better.
If The Chronicle intended to spur a rational debate about tax reform, it should have started with an accurate description of the tax system. It did not. For example, The Chronicle claims that the United States should maintain the system of taxing the worldwide income of corporations because previous efforts at doing something different have failed. In fact, there has been no previous effort at completely abandoning our worldwide system of taxation. There was a brief 2004 experiment that reduced taxes on a small portion of the foreign earnings of U.S.-based companies. That experiment provided some important lessons. If policymakers heeded those lessons, then the United States would not be the only major economy that maintains an antiquated approach to business taxes.
The key takeaway from the temporary reduction in taxes on foreign earnings is that, absent the punitive penalties in the current system, U.S. companies will invest more of their global earnings here at home. The 2004 reprieve resulted in more than $300 billion being invested in the U.S. economy, contributing to one of the largest U.S. capital investment surges since the end of World War II.
The job losses singled out by The Chronicle occurred during a period in which the country was still recovering from a recession. In fact, given the growth in capital investment, job losses would have been worse absent the temporary change to the tax code.
The critical question remains: How can the United States construct a tax code that sustains economic growth and enhances job creation? Our major economic competitors have explored this same question and overwhelmingly have concluded that it is best to move away from a system of taxing the worldwide earnings of corporations. Almost every major advanced economy has adopted a system that collects taxes on dollars earned within their borders but imposes little or no tax on income earned in foreign markets.
These other countries -- including, within the last four years, Canada, the United Kingdom, Germany and Japan -- realize that taxing overseas earnings places them and their local companies at a competitive disadvantage. They rightly concluded that an American-style tax system heightens the cost of doing business for companies, puts their homegrown economic champions at a disadvantage, encourages job creators to set up shop in foreign markets that recognize the importance of enabling frictionless cross-border flow of capital, and discourages the inflow of investment capital.
In contrast, a system of taxing local earnings but not global ones ensures that capital will flow to those markets where it can be used most productively. The United States, because of its best-in-class entrepreneurial ecosystem and the inflationary cost of operations in many emerging markets including China, stands to benefit from moving to such a system.
The path forward for the United States is to say “no” to the status quo. We hope The Chronicle will take a fresh look and say “yes” to tax reform that will advance California’s innovative leadership and economic future. The United States has a piecemeal and burdensome system for taxing companies that are successful internationally. With 95 percent of the world’s consumers outside the United States, and 63 million American jobs dependent on a global marketplace, we must develop a market-based, competitive international tax system that eliminates the burden on global growth and enables capital to be put to work in the United States for the benefit of the economy here at home.