Tax Reform Is a Way to Level the Global Playing Field

Published by Real Clear Markets

February 24, 2016

Today, the House Committee on Ways and Means will hold a crucial hearing on international tax reform. Specifically, members will hear how the international tax environment is destroying American jobs and undermining the economy. As Chairman Kevin Brady (R-Texas) succinctly stated in his hearing announcement, "Our outdated international tax rules and sky-high corporate tax rate continue to create an unfriendly environment that ultimately hurts our economy and American workers. Other countries around the world are also targeting American employers and making it even harder for them to create good jobs here at home."

Chairman Brady is exactly on point, and given actions by the European Union designed to penalize American multinational corporations (MNCs), the hearing is perfectly timed.

In recent weeks, the back and forth between the United States and the European Commission has finally awakened the US Treasury to the fact that European tax officials are disproportionately targeting American companies. Google for instance just shelled out $185 million in back UK taxes, yet some critics claim that's not enough, and other countries are lining up for an additional bite. Next up on the list: Amazon, Starbucks, and Apple.

Meanwhile the European Union is set to press ahead with the Organization of Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) project. The idea behind BEPS is the fallacious belief that MNCs are not paying their fair share of taxes. However, as I have argued previously, "many [of the proposals] would be detrimental to the United States, though some are harmless and a few are actually useful."

Add in the fact that the US corporate tax rate is one of the highest in the world, and unlike nearly all other countries, the United States taxes American firms on their earnings abroad, and it's clear that American companies are operating at a global disadvantage.

There is a way to level the current playing field for American companies who also do business overseas: tax reform which sharply lowers the corporate tax rate and moves to a territorial tax system—just taxing earnings here in the United States.

The US corporate tax rate stands 39.1 percent when you combine federal and state taxes. Compare that the average OECD average of 24.1 percent. And while other countries such as Canada, Japan, and England have all cut their corporate tax rates in recent years to increase competitiveness, the United States has made no such move. Even President Obama agrees the rate is too high, proposing in 2012 to lower it to 28 percent.

Passing comprehensive tax reform that lowers the corporate tax rate while moving to a territorial tax system would boost the national economy and create American jobs. In addition, comprehensive reform would go a long way towards encouraging US businesses to keep their headquarters right here at home. The right way to deal with corporate inversions is to make America an attractive country to do business, not to pile on new penalties. The United States should serve as a tax model to the world, not as a lesson in what not to do.

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Gary Clyde Hufbauer Senior Research Staff

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