Corporate Income Tax Myths and Truths

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” width=”240″ height=”159″ />Note: Guest blogger Kyle Buckley, a NCPA research associate, gives his thoughts on reforming the U.S. corporate tax system.

The presidential election season has produced a variety of none-too-polite campaign ads addressing U.S. tax policy.

Unfortunately, our tax structure is so convoluted that the Congressional Budget Office has released multiple reports, in order to give legislators a grasp of budget forecasts. Perhaps this is because the size of our tax code has tripled since 1975. In fact, the IRS reports that compliance costs the U.S. economy 163 billion dollars annually, including 6.1 billion hours of productivity, and this doesn’t even account for administrative overhead.

Romney’s plan is to codify many of the results found within the 2010 Bowles-Simpson report, commissioned by President Obama, which would simplify the tax structure, lower taxes, and broaden the tax base. Among the provisions would be a switch to a territorial tax system in place of the current corporate tax rate. Under such a system, corporate profits are taxed in the country in which they are earned, and not subject to the U.S. corporate tax. Those who support the idea argue that it would effectively provide an incentive for firms to repatriate their profits to the United States. Those who support the status quo may cringe at the idea of reforming the system to give companies a more competitive edge. After all, large firms are taking jobs overseas and ignoring the average American worker — why not just stick it to them? That thinking belies the real story and is based on a couple of myths that have been perpetuated as of late:

  • The United States is one of the least taxed developed countries. Critics argue that our credits, deferrals, and loopholes have a significant impact on the rate, but this is misleading. According to a study from the Tax Policy Center, “loopholes” only account for about a 4 percent reduction in corporate taxes, dropping the structural corporate tax rate to 31 percent; third highest of OECD countries.
  • Romney’s plan will incentivize companies to invest in and create jobs overseas. Romney would remove special interest loopholes, remove the tax on repatriation, and broaden the corporate tax base. Opponents say this policy will create a mass exodus as firms seek out the lowest available tax rate, but this is counterintuitive. In 2011 the Bureau of Economic Analysis noted that firms create jobs overseas in response to sales figures, not tax rates. Moreover, the dominant theory among investment economists is that when firms invest overseas, they tend to invest domestically as well.

The data on OECD countries with territorial systems is impressive. Outbound foreign direct investment and unemployment averages in countries with such a system are superior to the United States. Earlier this month the Tax Foundation estimated that there was $1.7 trillion in unrealized foreign-held corporate earnings. If we apply this figure to the results of the repatriation holiday created by the 2004 American Jobs Creation Act, one could expect about $765 billion to return to the U.S. economy.

Currently, the United States is the only G7 country without a territorial system, and according to the OECD, is the proud owner of one of the worst performing tax structures (25th out of 26) in terms of corporate tax revenue as a percent of GDP. A glance at the plummeting number of U.S. firms on the Fortune 500 list tells us that something is devastating U.S. multinational firms’ ability to operate in a global market. Perhaps it’s time to take the b

ridle off and let American firms do what they do best — compete.

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Note: Guest blogger Kyle Buckley, a NCPA research associate, gives his thoughts on reforming the U.S. corporate tax system.
The presidential election season has produced a variety of none-too-polite campaign ads addressing U.S. tax policy.
Unfortunately, our tax structure is so convoluted that the Congressional Budget Office has released multiple reports, in order to give legislators a grasp of budget forecasts. Perhaps this is because the size of our tax code has tripled since 1975. In fact, the IRS reports that compliance costs the U.S. economy 163 billion dollars annually, including 6.1 billion hours of productivity, and this doesn’t even account for administrative overhead.
Romney’s plan is to codify many of the results found within the 2010 Bowles-Simpson report, commissioned by President Obama, which would simplify the tax structure, lower taxes, and broaden the tax base. Among the provisions would be a switch to a territorial tax system in place of the current corporate tax rate. Under such a system, corporate profits are taxed in the country in which they are earned, and not subject to the U.S. corporate tax. Those who support the idea argue that it would effectively provide an incentive for firms to repatriate their profits to the United States. Those who support the status quo may cringe at the idea of reforming the system to give companies a more competitive edge. After all, large firms are taking jobs overseas and ignoring the average American worker — why not just stick it to them? That thinking belies the real story and is based on a couple of myths that have been perpetuated as of late:
The United States is one of the least taxed developed countries. Critics argue that our credits, deferrals, and loopholes have a significant impact on the rate, but this is misleading. According to a study from the Tax Policy Center, “loopholes” only account for about a 4 percent reduction in corporate taxes, dropping the structural corporate tax rate to 31 percent; third highest of OECD countries.
Romney’s plan will incentivize companies to invest in and create jobs overseas. Romney would remove special interest loopholes, remove the tax on repatriation, and broaden the corporate tax base. Opponents say this policy will create a mass exodus as firms seek out the lowest available tax rate, but this is counterintuitive. In 2011 the Bureau of Economic Analysis noted that firms create jobs overseas in response to sales figures, not tax rates. Moreover, the dominant theory among investment economists is that when firms invest overseas, they tend to invest domestically as well.
The data on OECD countries with territorial systems is impressive. Outbound foreign direct investment and unemployment averages in countries with such a system are superior to the United States. Earlier this month the Tax Foundation estimated that there was $1.7 trillion in unrealized foreign-held corporate earnings. If we apply this figure to the results of the repatriation holiday created by the 2004 American Jobs Creation Act, one could expect about $765 billion to return to the U.S. economy.
Currently, the United States is the only G7 country without a territorial system, and according to the OECD, is the proud owner of one of the worst performing tax structures (25th out of 26) in terms of corporate tax revenue as a percent of GDP. A glance at the plummeting number of U.S. firms on the Fortune 500 list tells us that something is devastating U.S. multinational firms’ ability to operate in a global market. Perhaps it’s time to take the bridle off and let American firms do what they do best — compete.

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Comments (8)

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  1. Joe Barnett says:

    These tax changes are like finding free money: they would boost the efficiency of the tax system, increasing revenue and reducing barriers to investment. Remarkably, though, the response of some members of Congress to unrepatriated profits is: Let’s institute an unrepatriated profits tax!
    That would make the tax system worse.

  2. William says:

    Broaden the base, lower the rate, and stop special interests from interfering!

  3. Nichole says:

    Let them compete..

  4. Robert says:

    “In fact, the IRS reports that compliance costs the U.S. economy 163 BILLION dollars annually…”

    ?!

    I know the saying is that you’ve got to spend money to make money, but the term ‘bloated’ does not even come close to doing this justice…

  5. Roget says:

    That is a conservative estimate too. The Laffer institute has it closer to 430 Billion.

  6. Chuck says:

    Letting U.S. firms invest overseas earnings into the U.S. economy has to be one of the most common sense approaches to revitalizing our economy. Why would anyone not want a company to spend money inside the U.S. after earning it in China, ect.?

  7. seyyed says:

    a territorial tax system is a great idea. upwards of a trillion dollars are locked out of the United States because companies fear beinging the money in to get taxed. Not just that but some companies are moving their headquarters abroad, outside of the U.S. tax base so they aren’t subject to so many taxes.

  8. Marcie says:

    “Earlier this month the Tax Foundation estimated that there was $1.7 trillion in unrealized foreign-held corporate earnings.” Maybe we should recycle this money and boost the economy.. instead of sending Obama to Hawaii for two weeks!