By Walter Galvin (Investor’s Business Daily):
Sens. Max Baucus and Orrin Hatch, the top tax writers in the U.S. Senate, issued a challenge to their colleagues last month:
We’re clearing out the tax code, and starting from scratch — consider all credits, deductions and “loopholes” to be wiped clean. If any of their 98 colleagues would like to preserve or add back certain provisions, they have until July 26 to make their case.
I applaud Baucus and Hatch, and hope their colleagues will take seriously this effort to simplify and improve an antiquated and overly complex tax code.
A goal of this process is to get the lowest rate possible, paid for with the revenue gained by cutting most credits and deductions that bog down the code. Broaden the tax base, and then lower the tax rate. It’s a plan that worked before, and can work again.
A lower rate is imperative to improving America’s competitiveness among modern economies. According to KPMG, the combined U.S. corporate tax rate of 40% is the second highest in the world — behind only the United Arab Emirates at 55%.
The corporate tax rate is even 15 percentage points higher than China’s, which has contributed to the Asian giant’s steady annual growth rate of about 7% in recent years — while we have been frozen at 2%.
Another issue that deserves special consideration in this process is the treatment of U.S. multinationals’ profits overseas. We must tear down existing barriers to repatriating these profits so American companies can freely bring cash home to reinvest in domestic operations and create American jobs.
There has been far too much demagoguery around the issue of foreign profits. When American companies sell products or services to customers abroad, they earn a profit. These are not profits from shipping jobs overseas, but quite the opposite — they are rewards for growing American companies serving customers in a global marketplace.
In the military, there is a term called the “tooth-to-tail ratio.” It refers to the personnel (the tail) it takes to supply and support each combat soldier (the tooth). The same relationship applies to American companies that have expanded to serve overseas markets. Foreign operations require the support of many workers back home, and the profits of these foreign operations should be available to support hiring back home.
The current tax rules governing foreign profits were designed decades ago, and are unfit for the 21st century economy. An estimated $2 trillion in U.S. corporate profits are left abroad by companies fearing a huge tax hit were they to bring those profits onto U.S. soil.
I believe most companies would rather create jobs and wealth back home, but find themselves hamstrung by old tax rules that impose outrageous levies if we repatriate those foreign earnings.
It’s an unfortunate situation. Healthy and confident American companies should be free to invest their worldwide profits here, to create American jobs. That, in turn, would create more opportunities for American wealth and greater American economic progress. Which is why I encourage all senators to express support for a tax code featuring open doors to cash earned abroad.
The solution is a simple two-prong approach: reduce U.S. corporate taxes at home, through the process Baucus and Hatch launched and similar efforts in the House, and open our doors to profits earned abroad.
It will also spur greater investments for research and development while expanding business and building up our national manufacturing base. Reforming our burdensome tax code will stimulate our still-struggling economy without adding another program to our already-struggling federal finances.
As Baucus and Hatch move forward with cleaning up the code and lowering the rate, they have the support of American companies looking to grow, compete on a fair playing field and expand internationally.
In sight is not only a user-friendly tax system with a lower rate, but also the jumpstart that our economy sorely needs. Reforming the tax code is certainly good for America’s companies. But, in the final analysis, a better, leaner tax code is much better for America’s workers.
Galvin is immediate past chairman of the National Association of Manufacturers’ tax committee and retired vice chairman of Emerson.