U.S. Corporate Tax Reform: Groupthink or Rational Debate?

July 19, 2011
| Reports
The United States is at risk of losing its global competitive advantage and with it faster per-capita income growth. To effectively respond, the nation must take concerted and strategic actions in a host of areas, including reform of the corporate tax code to transform it into a more effective tool to support private sector efforts to innovate and be more productive.

There is a growing consensus in Washington that the time has come for comprehensive corporate tax reform. Such reform could be the most important economic policy decision Washington makes. Its effects would likely have critical implications for the health of the U.S. economy for years to come.

While there are a range of issues any comprehensive tax reform package will have to address (including how foreign source income is taxed and the differential tax treatment of interest vs. dividends) this report addresses just two central issues:

  1. the extent to which reform should be focused on broadening the base and reducing so-called tax “distortions” on strengthening tax incentives to drive certain types of corporate investments; and
  2. the extent to which reform should be revenue neutral or cost revenue (at least in the short term) in order to lower the effective U.S. corporate rate.

If Washington is to get this right, the debate over corporate tax reform needs to be vigorous and informed by analysis and reason. Unfortunately, much of what passes for corporate tax reform policy analysis is nothing more than ideological assertions and Washington groupthink. Even among groups with differing ideologies, there is near universal belief in tax code simplicity. For example, the notion that the best tax code is one that is neutral and “doesn’t pick winners” is so widely touted that it has become conventional wisdom, is no longer even questioned and crosses party lines. Case in point, the Obama Administration’s Economic Recovery Board report on tax reform which stated: “The combination of a high statutory rate and numerous deductions and exclusions results in an inefficient tax system that distorts corporate behavior in multiple ways.” The issue of revenue neutrality is also confined by groupthink and ignores a significant body of academic research about the effects of taxes on corporate behavior. Anyone with the temerity to argue that simplicity should not be the main goal of corporate tax reform (and that the effective corporate rate needs to be lower) runs the risk of being treated with derision and disdain.

This report argues that this conventional wisdom is wrong and that if corporate tax reform follows the path laid down by the holders of the Washington economic consensus the result will be less growth, fewer jobs and reduced U.S. economic competiveness. In a world of intense international economic competition and a U.S. economy increasingly powered by innovation, a tax code that does not proactively “distort” the investment decisions of enterprises in the United States is one that is doomed to leave the United States behind in international competition. In fact, we are virtually the only nation in the world where the consensus is for eliminating, rather than expanding, incentives for business investment in innovation, capital equipment and machinery.

Rather, than a tax code that is based on the belief that Washington does not need to actively shape the structure and performance of the U.S. economy, the United States needs a corporate tax code that achieves three key things:

  1. provides direct incentives for U.S.-based enterprises to invest in the building blocks of innovation, productivity and competitiveness: research and development and innovation commercialization, workforce training, and machinery and equipment (including computers and software);
  2. taxes firms in internationally traded industries at a lower rate than firms in non- traded industries; and
  3. lowers the average effective corporate tax rate from its current levels.

Unfortunately, the conventional wisdom on tax reform, if followed, would lead to none of this. It would likely cut, not expand, key incentives that spur enterprises to invest more in the building blocks of growth and competitiveness, including the three most “costly” incentives, the deduction for domestic production, the R&D tax credit and accelerated depreciation. However, these are among the most pro-growth in the tax code. Reform would also likely raise taxes on traded sectors (sectors that compete globally such as vehicle production as opposed to those that do not such as barbershops) relative to their current rates (while lowering taxes on non-traded sectors), making them even less competitive than their competitors in other nations. And finally, if it is revenue neutral it would do nothing to lower the overall level of corporate taxation, thereby failing to address a key U.S. economic competitiveness challenge. American workers deserve better. At the very least, they should know that policymakers have heard and fairly considered all relevant arguments before deciding on a new tax policy.

Corporate Tax Reform Report Takes on Simplification Consensus

WASHINGTON – A simpler corporate tax code could be an anti-competitive, slower-growth tax code, warns a report released today by the Information Technology and Innovation Foundation.

With the Obama Administration and Congressional leaders possibly looking to eliminate a variety of corporate tax breaks as part of an eventual debt and deficit reduction plan, the report, “U.S. Corporate Tax Reform: Groupthink or Rational Debate,” warns this approach could undermine U.S. competitiveness and long-term economic growth. Read more »

What Would Pro-Growth Corporate Tax Reform Look Like?

July 19, 2011
Video and audio from the event.

There is a growing consensus in Washington that now is the time for comprehensive corporate tax reform. Such reform, if enacted, could easily be the most important economic policy decision Washington makes over the course of the next few years and its effects would likely have long term and important implications for the future health of U.S. economy. In this event, American Action Forum and ITIF host a discussion of how corporate tax reform can help drive U.S.

See video

Import Money – Export Goods

July 7, 2011
| Blogs & Op-eds

The June 2011 job creation figures were disappointing at best and also underscore the failure of the American economy to create decent jobs. In a New America Foundation article, Rob Atkinson proposes spurring good job creation with a tax holiday to bring overseas profits of U.S. back into the United States, a manufacturing strategy aimed at increasing exports and overcoming the stubborn theology that prays at the altar of the strong dollar.

Creating a Collaborative R&D Tax Credit

June 9, 2011
| Reports
Growing sectors of the economy increasingly rely on collaborative research to remain innovative and competitive. Even so, firms’ investment in collaborate research ventures has stagnated in the past decade, contributing to the United States overall competitiveness crisis. In contrast, a growing number of competing nations offer additional tax incentives for collaborative R&D. Yet, the R&D tax credit– the principle way the United States entices the private sector to invest in more R&D– falls short of effectively incentivizing research collaborations. Congress should act quickly and enhance the R&D tax credit to strengthen the incentive for firms to collaborate as well as make the credit more competitive with other countries tax incentives.

Restoring America’s leadership in innovation-based competitiveness is one of our greatest challenges. President Obama called it “this generation’s Sputnik moment.” But to do so is going to require significant changes to the U.S. innovation system. One way of doing so is reforming how we incentivize the private sector to invest more in the building blocks of innovation, specifically collaborative R&D. Growing sectors of the economy increasingly rely on collaborative research (e.g. research performed between a business and a university, federal lab, or consortium). Businesses are increasingly turning to universities, federal labs, and other external sources for research. For instance, the number of top ranked innovative commercial products borne from in-house private sector R&D declined from 47 percent in 1975 to 13 percent in 2006 and nearly all of the remaining 87 percent of new, innovative U.S. technologies in 2006 were developed by collaborations between businesses and federal labs, federal agencies, universities, and other businesses.

In response, competing countries are increasingly offering additional tax incentives to spur collaborative R&D. For example, Hungary reduces a company’s taxable income by up to 400 percent of the amount invested in collaborating with a university or research institution. Japan and Italy offer flat tax credits for collaborating with a university of research institution of up to 14 percent and 40 percent respectively. And in France firms can receive a 60 percent flat credit on R&D investments at universities and federal labs.

Yet, the R&D tax credit – the principle way government entices the private sector to invest in more R&D – falls short of effectively incentivizing research collaborations. To make the United States more competitive, Congress should make the following changes to the R&D tax credit:

  1. Expand the definition of basic research. Congress should eliminate language in the tax code that restricts the definition of basic research to projects “not having a specific commercial objective.”
  2. Double the rate for energy research consortia. In order to spur the expansion of more energy research consortia, Congress should boost the flat energy research consortia tax credit from 20 percent to 40 percent.
  3. Create a Collaborative R&D Tax Credit. If Congress is serious about making the United States the premier destination for innovation, it should make all collaborations between a business and a university, federal lab, or any research consortia eligible for a 40 percent flat tax credit.

Testimony on Digital Goods and Services Tax Fairness Act

May 23, 2011
| Testimony and Filings

Rob Atkinson testifies on the Digital Goods and Services Tax Fairness Act of 2011 before Subcommittee on Courts and Administrative Law of the U.S. House of Representatives. He urges Congress to create a national framework to ensure fair, consistent and non-discriminatory taxation of digital goods and services.

Testimony on Digital Goods and Services Tax Fairness Act

May 23, 2011
Video of the hearing on Digital Goods and Services Tax Fairness Act.

Rob Atkinson testifies on the Digital Goods and Services Tax Fairness Act of 2011 before Subcommittee on Courts and