By Claire Buchan Parker –
Leveling the playing field for American businesses and workers. Making the United States more attractive for investment. Maintaining a broad tax base.
These are sound policy goals both Republicans and Democrats can agree on —goals that are a topic of discussion today precisely because our country’s obsolete corporate tax policy is in desperate need of overhaul.
However, in yesterday’s speech on business tax reform, Treasury Secretary Jack Lew continued to question the “civic responsibilities” of American companies who have explored incorporating overseas, rather than addressing the fundamental inefficiencies in our tax code that cause these companies to look beyond our shores for a more competitive business environment in the first place.
This shortsighted approach is especially unfortunate when proven solutions to drive growth and competitiveness are obvious. Consider the case of one of our strongest economic allies.
A decade ago, multinational corporations were fleeing the United Kingdom at a breathtaking rate—running to countries like Ireland, the Netherlands and Switzerland to escape the UK’s outdated tax system and excessive rates. For some companies, business outside the UK accounted for as much as 75 percent of total earnings. Yet they owed UK taxes back home—even after paying taxes where the money was actually earned. British workers suffered while what the New York Times described as an “exodus of British companies fleeing the tax system” marched on.
Sound familiar?
Just as the pre-2009 UK did, the United States is burdening American-headquartered companies with one of the highest tax rates in the industrialized world. We, too, are putting workers on the losing end of a policy that makes inversions an all too common occurrence. We, too, have an overly complex and inefficient system that discourages investment at home, adds high compliance costs, and impedes competition abroad. Policymakers, companies and workers on all sides agree – the system is outdated and broken.
Unlike our allies across the Atlantic, however, we have yet to take the right steps to fit it. Here’s what the U.K. did:
- Reduced its corporate tax rates for multinational corporations; and
- Switched from an archaic system of double taxation (worldwide system) to one (a territorial tax) that eliminates the punitive toll on overseas earnings and encourages companies to bring that money home.
Now, the UK has a different story to tell.
An article in the Financial Times shortly after the reforms went into effect remarked that “the exodus [of corporations from the UK] has slowed down.” And instead of being a country to flee from, the U.K. has become a country to flee to. According to accounting firm EY, within just four years of the reforms taking effect, as many as 60 multinational corporations were considering relocating operations to the UK—with a potential to carry more than 1 billion pounds in tax revenue and 5,000 jobs with them.
The nonpartisan Tax Foundation also noted in 2012, “[T]he UK has become more competitive in mergers and acquisitions since the switch to territorial taxation in 2009.” The Foundation added that “the popular fears about territorial taxation have not come to fruition in the case of the UK.”
Instead, tax receipts increased, revenue as a share of GDP went up, and unemployment leveled off—and as recently as this year, the UK is topping its G7 counterparts in growth.
Meanwhile, at 39 percent, the U.S. still has the highest combined statutory corporate tax rate in the world—and a system that puts an extra toll on earnings already taxed overseas. This means nearly $2 trillion in earnings stays locked out of the U.S.
Our economy on many levels – including job growth – remains lackluster and we’re failing to create opportunities for wide-spread prosperity for the American people.
Yesterday, Secretary Lew missed an opportunity by failing to point out real solutions—which we know will succeed because we’ve seen it happen elsewhere. A decade ago, the UK was in a fierce debate over the merits of any sort of corporate tax reform; fortunately comprehensive, bipartisan solutions won out. By following their lead, we too will have a better story to tell—and the U.S. economy will be better for it.
A decade ago, the UK’s international tax policy was in no less of a mess than ours today. Their turnaround shows the success simple reforms that can bring.
If they did it, so can we.