The U.S. international tax system is outdated and fundamentally broken. How do we know?
Our international tax laws haven’t been updated since 1962, when the United States accounted for over 50 percent of the global economy and did not face serious competition from other nations.
The global economy has rapidly evolved since then; our international tax policies, however, have not. Today the United States has the highest statutory corporate tax rate in the developed world and tax laws that place a burdensome toll charge on American companies trying to bring home earnings from overseas.
Consequently, U.S. workers are placed at a global disadvantage, American companies are discouraged from maintaining their headquarters here, and our domestic economy loses a significant amount of investment to foreign competitors.
The solution is bipartisan, comprehensive tax reform. What does this look like?
The United States needs to overhaul its tax code and enact a modern international tax system—like those recently adopted by countless trading partners—so we can not only bring that investment home, but also watch it prosper. This starts with lowering the corporate tax rate, which, at 39.2 percent, is the highest in the industrialized world.
It also means eliminating the penalty for American companies that want to bring their foreign earnings home. Currently, globally-engaged U.S. companies pay taxes on their earnings here at home and on their foreign earnings in the country in which they operate. But then the United States taxes American companies again when they attempt to bring their foreign earnings home.
This “toll tax” results in $2 trillion of private capital being locked out overseas. No other nation in the G8—other than the U.S.—has such an outdated system of international taxation.
Accordingly, tax reform should follow the lead of our allies and trade partners who have eliminated this double tax—the result being that U.S. companies would continue to pay the taxes here and abroad, and the United States would become a more attractive place to locate a business, invest and hire. Freeing up that $2 trillion would strengthen our economy through more jobs, better worker benefits, increased research and development, plant expansions, and new equipment purchases.
How can we get there?
A major component of reform is how our lawmakers calculate the costs and benefits of tax policies. Currently, Congressional tax committees use a model known as static scoring—a limited model that assumes the economy will be completely unchanged, regardless of how much the government taxes or spends. In practice, that is a limited, and often wildly inaccurate, measurement that ignores the obvious: tax policies do have a broader effect on the economy.
We should instead be measuring legislation based on economic realities. The type of reality-based scoring championed by Ways & Means Committee Chairman Paul Ryan does just this. It doesn’t mean tax cuts return dollar-for-dollar in increased revenue; however, common sense tells us that the increased growth from more investment and jobs in the United States will generate at least some new revenues in other areas. Policy decisions affect behavior on a macroeconomic scale, and the reality-based scoring approach taken by Rep. Paul Ryan (R-Wisc.) acknowledges this fact; static scoring does not.
What are the benefits of a modern international tax system?
Comprehensive reform that modernizes our international tax system and lowers tax rates will:
- Promote domestic job creation among U.S.-headquartered companies opening and expanding into new foreign markets;
- Spur economic growth across a wide array of industries and sectors important to America’s long-term prosperity;
- Boost the economy by making the U.S. a more attractive place to maintain, launch or relocate a business; and
- Encourage innovation through increased research and development, and capital investment—all right here in the United States.
Indeed, our international tax laws should encourage job creation, economic growth and innovation here at home instead of forcing investment and economic opportunity away from America. A half century of inaction is enough. Conversely, strengthening our economy in the 21st Century for the benefit of our workers, families and communities demands tax reform. The time for this critical reform is now.