December 08, 2010
Roadmap for Growth - Fiscal Policy: Competitive Taxation and Deficit Reduction
Related Studies & Resources
Sustainable Growth Through Responsible Spending
December 8, 2010
Fast Facts: Competitive Taxation
U.S. companies pay tax at far higher rates than their international competitors:
- We are the only G8 country that taxes the overseas business income of its corporations
- We have the second-highest statutory corporate tax rate in the OECD, 13 percentage points higher than the OECD average
- The competitiveness of U.S. R&D tax incentives ranks 24th out of 38 countries, below advanced emerging economies such as Brazil, China, India and Singapore
Source: OECD: Taxation of Corporate and Capital Income (2010)
Note: Includes central (i.e. federal) and sub-central (i.e. state) rates
To increase the pace of economic growth and decrease unemployment, American businesses must have the confidence to invest and to hire. Changes in tax policy can create the conditions for more robust job creation in the private sector, stronger capital formation, higher exports and increased foreign investments. Conversely, uncertainty and excessive taxation restrict our ability to innovate, compete and hire.
In 1986, the United States embarked on tax reform that reduced the corporate tax rate from 46 percent to 34 percent, providing U.S. companies one of the most competitive tax rates in the world at the time. Since 1986, however, changes in the world economy and the efforts of other governments to attract investment and job creation have left the United States with one of the least competitive tax systems in the world—disadvantaging American companies and American workers.
In 2010, the combined federal and state corporate tax rate in the United States is 39.2 percent, the second highest in the developed world and 50 percent higher than the corresponding 25.3 percent average statutory rate among other Organization of Economic Cooperation (OECD) countries. A lower corporate tax rate is necessary to make the United States a more attractive location for the capital investment needed to fuel job growth.
The rest of the world also promotes foreign investment with more competitive tax treatments, understanding that domestic workers and economies benefit when companies export goods and services abroad and add high-paying domestic jobs to support their worldwide operations. Here in the United States, companies’ foreign operations serve as platforms for U.S. goods and services to expand into new foreign markets, which, in turn, grows U.S. employment.1
All other G-8 countries and most other OECD countries have territorial tax systems that permit foreign earnings—taxed once already in the foreign location—to be brought back for reinvestment in the domestic economy and incur little or no additional home country tax. The U.S. system, in contrast, creates a tax disadvantage for American companies, which pay tax in the foreign location in which they operate and additional U.S. taxes when they bring foreign earnings home. With 95 percent of the world’s consumers outside the United States, U.S. tax law is a detriment to the growth of American companies.
Innovation and technological advances achieved through research and development (R&D) by U.S. companies have long been responsible for major increases in American economic growth and worker productivity. Yet, a 2009 OECD study placed the United States 19th out of 32 OECD countries in terms of the competitiveness of our R&D tax incentives and 24th out of an expanded group of 38 countries. According to this study, the U.S. tax incentives for R&D are behind those of advanced emerging economies such as Brazil, China, India and Singapore. The OECD study does not consider special tax rates that apply to innovation income in some countries or the temporary nature of the U.S. R&D tax credit—factors that would make the U.S. disadvantage even greater. As economic growth is increasingly dependent on leading through innovation, the U.S. must take action to stay ahead.
To support U.S. competitiveness and job growth, the United States needs to:
- Implement comprehensive tax reform. We need to reconsider our nation’s entire corporate tax system and redesign it to promote investment in the United States and strengthen U.S. competitiveness in the global marketplace. A stable, reliable, equitable and non-discriminatory tax system that provides a level playing field is essential for long-term economic growth.
- Competitive corporate tax rates are needed to improve the ability of American companies. The U.S. corporate tax rate, once one of the lowest in the world, is now the second highest among the 33 OECD countries and more than 50 percent higher than the OECD average. The high U.S. corporate tax rate reduces investment and leads to lower wages for American workers.
- The U.S. system of international taxation needs to provide U.S.-headquartered companies the same ability to compete internationally as the tax systems of our major trading partners provide for their companies. Our trading partners have increasingly adopted territorial tax systems that allow their companies to expand into foreign markets and access foreign earnings while paying little or no additional tax in their home countries on profits earned abroad. The United States is the only G-8 country and one of only a few OECD countries without a territorial tax system.
- Provide for business certainty by extending expired provisions. The short-term nature of many business tax incentives reduces their ability to encourage the very activities they are intended to promote, diminishing American competitiveness. As of this writing, business tax incentives that expired at the end of 2009, including the R&D credit and important international provisions, have not yet been extended. Business Roundtable calls for their immediate and seamless extension for 2010 and a shortterm extension for 2011 and 2012 to reduce ongoing business uncertainty. In view of the nascent economic recovery, these extensions should be implemented without raising new taxes on business or consumers.
Source: OECD, “Tax treatment of business investments in intellectual assets: an international comparison,” 2006.
Fast Facts: Deficit Reduction
The growth in government spending is unsustainable
- Government spending is projected to reach 25% of GDP by 2020
- In just three years, the precentage of debt held by the public has ballooned from 36% of the GDP in 2007 to 62% of GDP at the end of fiscal 2010
- In the next 10 years, publicly held debt is projected to grow to 90% of GDP
- The annual budget deficit is projected to be over $1 trillion in 2011
- The 2009 and 2010 deficits are the largest deficits relative to the size of the economy since World War II
Source: White House Office of Management and Budget, Congressional Budget Office
Federal government spending is projected to grow significantly in the decades ahead. Under the Administration’s fiscal year 2011 budget, the Congressional Budget Office (CBO) estimates that government spending in 2020 would reach 25.2 percent of GDP, significantly higher than the average of 21 percent of GDP over the past 40 years. Annual deficits would average nearly $1 trillion each year over the 10-year period between 2011 and 2020. The debt held by the public would grow from 36 percent of GDP in 2007 to 90 percent of GDP by 2020. Under a range of other likely scenarios considered by CBO, deficits grow even more rapidly and cause the debt burden to exceed 100 percent of GDP within the decade.
Such significant deficits crowd out private investment and require increased foreign borrowing, resulting in less business investment, large interest payments to foreign lenders, slower economic growth, and a reduced standard of living for American families.
The increased debt load also brings a greater risk of future downgrades. The U.S. Treasury’s lending rates are traditionally considered as the floor for corporate and individual rates. If Treasury’s lending rates go up, so will everyone else’s.
Longer term projections show the situation getting even worse as government spending on Social Security, Medicare and Medicaid grows steadily with the retirement of the baby boom generation and the growth in the per beneficiary cost of health care. By 2025, under one realistic scenario considered by CBO, revenues will be insufficient to cover spending on mandatory programs (Social Security, Medicare, Medicaid and other health programs) and interest on the debt by 2025. In other words, if the government were forced to not run a deficit, there would be no money left for all other government spending— national security, education and other vital programs. Despite the inherent obstacles that must be overcome, serious reform of mandatory spending programs is clearly necessary if the United States is to avoid a fiscal crisis.
Finding a solution will not be easy, but our economic security and future living standards depend on managing down the deficit and debt, and curtailing the growth in federal spending.
Our economic security and Americans’ future standard of living depend on managing down our deficit and debt, and curtailing the growth in federal spending. Business Roundtable can offer its experience and expertise and wishes to work with Congress and the Administration on consensus solutions to this difficult task.
- To put our economy on a sustainable path forward, the U.S. government must undertake significant reforms to reduce the growth of government spending, focusing on mandatory spending programs where the most rapid growth is occurring.
- Closely examine all aspects of the federal budget, along with federal programs and policies, and policy recommendations designed to help the Administration and Congress achieve consensus deficit targets that maximize economic growth while putting the U.S. economy on a more sound fiscal foundation.
- Tackle Social Security reform through changes that ensure long-term benefits are based on demographic and economic realities yet allow the program to meet its promises to current retirees and those nearing retirement. These reforms should include incentives for private savings and investment.
- Restore market forces to health care; insert cost and quality data into the process to enable individuals to act as consumers versus beneficiaries and create a safety net for treatments that pose catastrophic financial risk to individuals.1
1 Matthew Slaughter, “How U.S. Multinational Companies Strengthen The U.S. Economy,” Business Roundtable, Spring 2009.