John M. Engler
Testimony before the Committee on Finance
Subcommittee on Fiscal Responsibility and Economic Growth
September 13, 2011 (2 p.m.)
Testimony before the Committee on Finance
Subcommittee on Fiscal Responsibility and Economic Growth
September 13, 2011 (2 p.m.)
American multinational companies are responsible for significant growth of productivity in the United States. Higher worker productivity in turn is the key determinant of higher wages and a higher standard of living for American workers. A Federal Reserve Board study finds that American companies with international operations are responsible for more than three-fourths of the increase in labor productivity in the U.S. corporate sector between 1977 and 2000 and all of the labor productivity growth in the U.S. corporate sector in the late 1990s. Higher productivity results from greater use of advanced technology, organizational efficiency, and innovation spurred by R&D.
Further, according to analysis of the Bureau of Economic Analysis, this productivity advantage increases with the global scope of a company's operations. In 2008, American companies operating in 10 or more countries had 54 percent greater value added per employee than those companies operating in just one foreign country and 21 percent greater value added per employee than companies that operated in two to nine foreign countries.
America's businesses have the capability to expand into world markets and deliver the highest quality and most innovative products to consumers. But we are currently competing on a tilted playing field with an antiquated tax code developed for a different era. Tax reform can level the playing field and allow American businesses and their American workers to compete at home and abroad against the best foreign businesses in the world.
U.S. Corporate Tax Reform: Worldwide vs. Territorial Tax Systems
Current U.S. tax policy fails to recognize the value contributed to our economy by successful American companies with worldwide operations.
We would never think to tax a foreign-headquartered company on their earnings outside the United States, but our current law imposes tax on the worldwide income of U.S.-headquartered companies by virtue of their being incorporated in the United States. In effect, we treat U.S.-headquartered companies less favorably than foreign companies by this disparate tax treatment.
The trend over the past 15 years among OECD countries has increasingly been away from worldwide systems of this type toward "territorial" systems under which the country of incorporation exempts active foreign business income from domestic taxation. Today, 26 of the 34 OECD countries employ territorial tax systems, with Japan and the United Kingdom the most recent to adopt this system in 2009. Of the 26 territorial countries in the OECD, 18 fully exempt foreign earnings while eight exempt 95 percent to 97 percent of foreign earnings.
The seven OECD countries other than the United States that employ worldwide tax systems have tax rates significantly below the United States (an average rate of 21 percent), and, excluding Ireland (which has a 12.5 percent tax rate), undertake little foreign investment (together accounting for less than 2 percent of the world's outward foreign direct investment).
A territorial tax system would allow American companies to compete on a level playing field in foreign markets. Under current law when a U.S.-headquartered company is competing abroad against a foreign-headquartered company, it must factor in the higher rate of tax it will pay on its foreign earnings when it brings these earnings home. This higher rate of tax makes the U.S.- headquartered company less competitive relative to its competition -- it can only successfully compete if it is sufficiently more productive to overcome this tax disadvantage and still earn a competitive rate of return on its investments.
The unfortunate outcome is that the United States is giving away markets to foreign-headquartered companies that may be less efficient than our American companies because American companies cannot overcome this extra tax hurdle imposed by our worldwide tax system. By reducing the market potential of our American companies, their U.S. operations are smaller than they would otherwise be, their U.S. employment is reduced, and their purchases from U.S. suppliers are reduced. Each of these factors results in a contraction of the U.S. economy and fewer jobs and lower wages for American workers. U.S. Corporate Tax Reform: Statutory Corporate Tax Rate
Another essential change to our tax system to promote economic growth is a significant reduction in the statutory corporate tax rate. The U.S. rate is out of step with our trading partners to the detriment of investment in the United States. The loss in investment and economic activity reduces economic growth and job creation. According to the OECD, the U.S. statutory corporate tax rate (including deductible subnational taxes) was 39.2% in 2011, more than 50 percent higher than the 25.0 percent average tax rate for the rest of the OECD. The U.S. rate is the second highest among the 34 countries in the OECD, only fractionally below Japan's.
Since 1988, the average OECD corporate income tax rate (excluding the United States) has dropped 19 percentage points while the U.S. federal rate increased by one percentage point over the same period.
And reductions in the corporate rate continue as countries know this reform plays a significant role in attracting investment and boosting growth in their economies. For example:
An increase in capital investment translates into to an increase in jobs, wages, living standards and higher worker productivity.
Because of the effect of the corporate income tax on capital investment and wages, economic research suggests that a significant part of the corporate income tax is more appropriately
viewed as a tax on labor through a reduction of employment opportunities and wages—and not primarily a tax on the owners of capital, including shareholders.
A study by the Congressional Budget Office, for example, estimates that 70 percent of the burden of the U.S. corporate income tax is borne by American workers in the form of lower wages, with the remaining 30 percent borne by Americans through a reduced rate of return on their savings.
Recent research by the OECD concludes that the corporate income tax has the most adverse impact of economic growth of any tax.
In a 2005 study, the Congressional Joint Committee on Taxation compared individual income tax reductions and corporate income tax reductions and concluded that a reduction in the corporate income tax had the greatest impact on increasing long-term economic growth, due to increased capital investment and increased labor productivity
Our competitors have reduced corporate tax rates as a way to attract investment, create jobs, and increase wages. We need to do the same, especially at this time of stagnating wages and insufficient job creation.
Proposals
The U.S. should adopt a competitive territorial tax system comparable to those of our trading partners and reduce the federal corporate tax rate to a level that when combined with state income tax burdens results in a combined statutory tax rate no higher than the average of our major trading partners.
Together these proposals would boost the worldwide competitiveness of American companies, increase jobs for American workers, increase wages, and promote long-term economic growth for the United States.
Conclusion
It is clear that our economy suffers from many deficits -- the fiscal deficit, a jobs deficit, and a growth deficit. Policies directed at improving the long-run growth of the economy can help us bring down all three of these deficits.
Corporate tax reform is one of the most straightforward policies this Congress can undertake to promote economic growth. A simpler, flatter, lower rate corporate tax system that incorporates a competitive territorial tax system like our trading partners can provide the foundation for a U.S. corporate tax system designed to promote economic growth and job creation.
These are not abstract ideas. Nearly every one of our trading partners has a corporate tax system that resembles this proposal. The design elements of this reform are very close to those put forward by the co-chairmen of the President's Fiscal Commission.
Growth enhancing tax reform is an important element of a comprehensive deficit reduction program, but its benefits are even greater. It should be fully pursued.
On behalf of Business Roundtable, I look forward to working closely with this Committee toward this important goal, reducing the deficit, increasing economic growth, and putting the economy on a path of sustained job creation.
Further, according to analysis of the Bureau of Economic Analysis, this productivity advantage increases with the global scope of a company's operations. In 2008, American companies operating in 10 or more countries had 54 percent greater value added per employee than those companies operating in just one foreign country and 21 percent greater value added per employee than companies that operated in two to nine foreign countries.
America's businesses have the capability to expand into world markets and deliver the highest quality and most innovative products to consumers. But we are currently competing on a tilted playing field with an antiquated tax code developed for a different era. Tax reform can level the playing field and allow American businesses and their American workers to compete at home and abroad against the best foreign businesses in the world.
U.S. Corporate Tax Reform: Worldwide vs. Territorial Tax Systems
Current U.S. tax policy fails to recognize the value contributed to our economy by successful American companies with worldwide operations.
We would never think to tax a foreign-headquartered company on their earnings outside the United States, but our current law imposes tax on the worldwide income of U.S.-headquartered companies by virtue of their being incorporated in the United States. In effect, we treat U.S.-headquartered companies less favorably than foreign companies by this disparate tax treatment.
The trend over the past 15 years among OECD countries has increasingly been away from worldwide systems of this type toward "territorial" systems under which the country of incorporation exempts active foreign business income from domestic taxation. Today, 26 of the 34 OECD countries employ territorial tax systems, with Japan and the United Kingdom the most recent to adopt this system in 2009. Of the 26 territorial countries in the OECD, 18 fully exempt foreign earnings while eight exempt 95 percent to 97 percent of foreign earnings.
The seven OECD countries other than the United States that employ worldwide tax systems have tax rates significantly below the United States (an average rate of 21 percent), and, excluding Ireland (which has a 12.5 percent tax rate), undertake little foreign investment (together accounting for less than 2 percent of the world's outward foreign direct investment).
A territorial tax system would allow American companies to compete on a level playing field in foreign markets. Under current law when a U.S.-headquartered company is competing abroad against a foreign-headquartered company, it must factor in the higher rate of tax it will pay on its foreign earnings when it brings these earnings home. This higher rate of tax makes the U.S.- headquartered company less competitive relative to its competition -- it can only successfully compete if it is sufficiently more productive to overcome this tax disadvantage and still earn a competitive rate of return on its investments.
The unfortunate outcome is that the United States is giving away markets to foreign-headquartered companies that may be less efficient than our American companies because American companies cannot overcome this extra tax hurdle imposed by our worldwide tax system. By reducing the market potential of our American companies, their U.S. operations are smaller than they would otherwise be, their U.S. employment is reduced, and their purchases from U.S. suppliers are reduced. Each of these factors results in a contraction of the U.S. economy and fewer jobs and lower wages for American workers. U.S. Corporate Tax Reform: Statutory Corporate Tax Rate
Another essential change to our tax system to promote economic growth is a significant reduction in the statutory corporate tax rate. The U.S. rate is out of step with our trading partners to the detriment of investment in the United States. The loss in investment and economic activity reduces economic growth and job creation. According to the OECD, the U.S. statutory corporate tax rate (including deductible subnational taxes) was 39.2% in 2011, more than 50 percent higher than the 25.0 percent average tax rate for the rest of the OECD. The U.S. rate is the second highest among the 34 countries in the OECD, only fractionally below Japan's.
Since 1988, the average OECD corporate income tax rate (excluding the United States) has dropped 19 percentage points while the U.S. federal rate increased by one percentage point over the same period.
And reductions in the corporate rate continue as countries know this reform plays a significant role in attracting investment and boosting growth in their economies. For example:
- The United Kingdom reduced its rate in stages from 28% in 2010, to 26% in 2011, with announced budget plans to lower it to 25% in 2012 and 23% by 2014.
- Canada reduced its federal rate from 22% in 2007 to 18% in 2010, to 16.5% in 2011, and 15% in 2012. In 2012 the combined federal and provincial rate will be about 25%.
An increase in capital investment translates into to an increase in jobs, wages, living standards and higher worker productivity.
Because of the effect of the corporate income tax on capital investment and wages, economic research suggests that a significant part of the corporate income tax is more appropriately
viewed as a tax on labor through a reduction of employment opportunities and wages—and not primarily a tax on the owners of capital, including shareholders.
A study by the Congressional Budget Office, for example, estimates that 70 percent of the burden of the U.S. corporate income tax is borne by American workers in the form of lower wages, with the remaining 30 percent borne by Americans through a reduced rate of return on their savings.
Recent research by the OECD concludes that the corporate income tax has the most adverse impact of economic growth of any tax.
In a 2005 study, the Congressional Joint Committee on Taxation compared individual income tax reductions and corporate income tax reductions and concluded that a reduction in the corporate income tax had the greatest impact on increasing long-term economic growth, due to increased capital investment and increased labor productivity
Our competitors have reduced corporate tax rates as a way to attract investment, create jobs, and increase wages. We need to do the same, especially at this time of stagnating wages and insufficient job creation.
Proposals
The U.S. should adopt a competitive territorial tax system comparable to those of our trading partners and reduce the federal corporate tax rate to a level that when combined with state income tax burdens results in a combined statutory tax rate no higher than the average of our major trading partners.
Together these proposals would boost the worldwide competitiveness of American companies, increase jobs for American workers, increase wages, and promote long-term economic growth for the United States.
Conclusion
It is clear that our economy suffers from many deficits -- the fiscal deficit, a jobs deficit, and a growth deficit. Policies directed at improving the long-run growth of the economy can help us bring down all three of these deficits.
Corporate tax reform is one of the most straightforward policies this Congress can undertake to promote economic growth. A simpler, flatter, lower rate corporate tax system that incorporates a competitive territorial tax system like our trading partners can provide the foundation for a U.S. corporate tax system designed to promote economic growth and job creation.
These are not abstract ideas. Nearly every one of our trading partners has a corporate tax system that resembles this proposal. The design elements of this reform are very close to those put forward by the co-chairmen of the President's Fiscal Commission.
Growth enhancing tax reform is an important element of a comprehensive deficit reduction program, but its benefits are even greater. It should be fully pursued.
On behalf of Business Roundtable, I look forward to working closely with this Committee toward this important goal, reducing the deficit, increasing economic growth, and putting the economy on a path of sustained job creation.