(WASHINGTON) - In response to President Obama's corporate tax reform framework announced today, ITIF president Rob Atkinson made the following comment:
"It is a no-brainer that we need to overhaul corporate taxes. It is unfathomable that the United States has the second highest statutory and among the highest effective corporate tax rate in the world (even if the administration data suggest that our effective tax rate is on par with other nations). So the Obama Administration deserves credit for taking this on.
However, the Administration's proposal has too much of "robbing Peter to pay Paul" and holds back on real reform in the name of fiscal austerity. "Not adding a dime to the deficit" might win votes but it won't fix a fundamentally uncompetitive U.S. corporate tax code. In fact, we need to add more than a dime to the deficit if we truly want to lower the tax burden on the companies, especially those creating the products and jobs of the future and competing in international markets.
For example, while expanding and making permanent the R&D tax credit is critical for innovation-based competitiveness, the Administration needs go further and propose raising the credit to 20 percent, not 17 percent. The Administration would do well to also follow the lead of many of our competitors and introduce a "patent box" that taxes income from innovation at a lower rate.
The Administration touts the benefits of simplicity and a tax code that does not "distort" investment decisions. But not all distortions are anti-growth, many, such as the R&D credit and accelerated depreciation, are growth enhancing. And so is the domestic production deduction, which the administration proposes expanding, even though it distorts "choices such as where to produce [and], what to invest in."
This is why it is so troubling that the Administration is considering ending accelerated depreciation. We want companies to invest in machine equipment and software. Ending this will result in less investment and productivity. And compensating for it by providing small companies immediate expensing is really distorting the tax code. Likewise, the Administration's promise to cut taxes on small business while being revenue neutral can only mean one thing, that mid-sized and large companies will pay higher taxes. There is no reason for the Administration to propose that any changes to get more parity between large corporations and non-corporate counterparts "should not affect small businesses." There is absolutely no reason for tax code to favor companies on the basis of size. Large companies are just as important to the health of the U.S. economy as small ones, if not more since they pay higher wages, invest more in R&D and export more - all goals the Administration wants to rightly push for.
There are definite reasons for the tax code to favor particular activities (like R&D and investment in machines) over other activities (like investment in buildings). The payoffs to the economy of the former are much higher than the latter. So when the administration says, "by allocating capital inefficiently, this system lowers living standards now and could also impede technological innovation" it is making a statement that is not based on fact, but rather the prevailing ideological views of the tax economists in the Treasury.
We must be sure the election-year drumbeat for tax simplification does not deafen us to the reality that the countries that are gaining on us economically are using their tax codes to spur innovation-based competitiveness. Why would we go in the opposite direction? The Administration complains that some industries pay less than others. They do and they should. But right now, it's in the wrong direction. Electric utilities, which are not competing in global markets, pay a lower effective rate than manufacturers, which are. In this sense the Administration's proposal to expand and reform the domestic production deduction so that manufacturers pay a much lower rate should be applauded.
However, the proposals to pay for this and other incentives are problematic. Ending deferral of foreign-sourced income would mean U.S.-headquartered multinational companies would face much higher tax rates than their competitors when operating in other countries and make them less competitive. If the Administration is truly concerned about this, they should, as they propose, go after income shifting, but not eliminate deferral.
The Administration feels it is forced to do this in order to find revenues to pay for other cuts and incentives. But in the end, it's not about being revenue-neutral from a budget scoring point of view. It's about empowering the U.S. economy through a smart tax code that boosts the broad and sustained U.S. economic growth that will generate sufficient tax income. The only way that will truly happen is for the Administration and Congress to bite the bullet and acknowledge that corporate tax reform cannot and should not be revenue neutral. It has to be about lowering the effective rate on U.S. industry. If they need "pay-fors" the place to look is on the individual side, for example ending the mortgage interest deduction or higher capital gains and dividend taxes."
The Information Technology and Innovation Foundation (ITIF) is a Washington, D.C.-based think tank at the cutting edge of designing innovation strategies and technology policies to create economic opportunities and improve quality of life in the United States and around the world. Founded in 2006, ITIF is a 501(c)(3) nonprofit, non-partisan organization that documents the beneficial role technology plays in our lives and provides fact-based analysis and pragmatic ideas for improving technology-driven productivity, boosting competitiveness, and meeting today's global challenges through innovation. For additional information, visit ITIF at www.itif.org or contact Steve Norton at (202) 626-5758 or email@example.com.