Published: October 12, 2012
By John Engler
October 12, 2012
U.S. companies don't get a tax break for moving plants overseas. They are, however, socked with an extra bill for bringing home earnings.
America's corporate tax rate is too high and needs to come down. Who says so? President Barack Obama and Gov. Mitt Romney—and America's jobs creators who believe lower rates are a necessity for economic growth. At last week's presidential debate, the two candidates agreed on the need to reduce the U.S. corporate tax rate, now the highest in the world and a full 14 percentage points above the average rate among major advanced economies.
What the candidates didn't agree on was whether there is a deduction in the U.S. tax code that encourages companies to move plants overseas. Mr. Obama contended that such a deduction exists. Mr. Romney said, "I've been in business for 25 years and I don't know what you're talking about."
According to the nonpartisan congressional Joint Committee on Taxation, there are no specific tax credits or deductions for moving plants and jobs overseas. While the tax code provides a deduction for all business expenses, including plant-closing costs, severance pay and worker retraining, the simple fact is that businesses don't make relocation decisions on the basis of a tax deduction.
One couldn't blame them, though, for looking enviously at companies overseas in countries where the corporate tax rate is more conducive to growth. The high rate in the U.S. hurts the economy, which is currently growing at less than 2%, frustrating millions of American workers looking for jobs.
A high corporate tax rate is not the only burden on doing business in the U.S. Also embedded in the tax code is an antiquated system that governs U.S. taxation of foreign earnings. Today the U.S. is unique among the G-8 countries in taxing foreign earnings if a company seeks to bring those earnings home. This "world-wide" tax system has been in place since the establishment of our income-tax system in 1913.
The system has simply not kept up with the demands of today's global marketplace, where 95% of the world's consumers live outside the U.S. All other G-8 countries—and 28 of the 34 member nations of the Organization for Economic Cooperation and Development—use "territorial" tax systems. This means a company's sales in foreign markets are taxed at the rate of that local market—the same rate borne by other competitors.
By contrast, under the current U.S. system, after an American company pays that local tax, it finds the Internal Revenue Service waiting with a big tax bill when the company tries to bring foreign earnings back to the U.S. Why? Because America's tax law requires the payment of an additional tax—generally the difference between the U.S. rate and the tax rate in the foreign market.
According to J.P. Morgan, U.S. companies today control $1.7 trillion in foreign earnings held outside the U.S., earnings they don't plan to repatriate. If the U.S. were to adopt a territorial system, it would eliminate the tax barrier that discourages American companies from bringing their money home where it could be used for capital investment, R&D dividends or other ways to support economic growth.
International tax rules made little competitive difference 50 years ago when American companies dominated world commerce—the U.S. had 17 of the top 20 global companies ranked by sales. Compare that with 2012, when just five American companies are in the top 20. Today, outdated U.S. tax rules make it harder for U.S. companies to succeed against international competitors.
Some suggest that reducing the current 35% U.S. corporate rate to the 25% average in the Organization for Economic Cooperation and Development would be enough to eliminate the anticompetitive effects of our international tax rules. But foreign countries also make aggressive use of investment incentives, lowering their effective corporate tax rate below the statutory ones.
Thus, even if we reduce the U.S. statutory corporate tax rate to the average 25%, the U.S. companies would still face higher taxes here under the current world-wide tax system if they brought foreign earnings home.
Other countries have recognized the challenges of international trade, adopting territorial tax systems even as they lowered corporate tax rates. Japan and the United Kingdom recently moved to territorial systems with the explicit goal of helping their companies compete more effectively around the world.
Detractors sometimes claim that repatriated funds would do little to help the U.S. economy, contending that the dollars would merely lead to share buybacks. This narrow train of thought overlooks the likelihood that shareholders would redeploy those funds to the benefit of domestic investment, consumption and hiring.
Critics make another thinly based claim: Moving to a territorial system will prompt U.S. companies to shift jobs overseas. Really? The 85% of developed nations that have opted for territorial systems surely don't want to put their own citizens out of work.
The dual components of corporate tax reform—a reduction in the U.S. corporate tax rate and a modernized international tax system like those of our trading partners—are crucial to regaining U.S. economic growth. Only with growth will American workers reap the benefits of the rapidly growing consumer markets around the world. On that, also, Messrs. Obama and Romney should agree.
Mr. Engler is president of the Business Roundtable.