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“The United states has fallen so out of step with the rest of the world. We have the highest tax rate of any economy in the world – I think that’s widely understood – it’s widely understood why that’s a problem, and there are features of our tax code – for example, the way we tax international income, which are the worst of all worlds – we collect very little revenue and we create a lot of distortions.”
– Jason Furman, chairman of the Council of Economic Advisors speaking at The Atlantic’s “Summit on the Economy” on April 23, 2015
There is strong consensus that the current system is broken and that even revenue-neutral reform could promote investment in the United States and encourage multinational corporations to repatriate money currently held offshore for tax reasons. The American Coatings Association (ACA) believes that there is a real opportunity for bipartisan tax reform in the current Congress. ACA represents the $24 billion dollar paint and coatings industry in the United States, operating in all 50 states, and employing over 268,000 people engaged in the manufacture, application, and distribution of its products.
The Obama Administration itself has made statements that support the idea that the current system is in need of reform, including lowering the statutory tax rate from 35% to 28%.1 In addition to Jason Furman’s comments noted above, U.S. Treasury Secretary Jack Lew recently told the House Ways and Means Committee, “I believe, as does the president, that there is plenty of opportunity for bipartisan cooperation, … starting with business tax reform.“2 Additionally, The New York Times recently observed that corporate tax reform would
“…foster a change in corporate thinking. Companies would make their financing and investing decisions with more of an eye to pretax profits rather than tax planning. American companies tie themselves in knots to avoid bringing foreign profits home. They borrow money instead of repatriating foreign profits to finance domestic investment, or they invest offshore profits in foreign businesses simply to avoid triggering American taxes. All that tax planning costs money and sways companies from investing in the opportunities that generate the highest pretax profits.”3
U.S. manufacturers face higher corporate tax liability than almost all of their competitors in other countries. The corporate tax rate in America is generally considered to be the highest among developed nations. This puts the U.S. manufacturing industry at a significant competitive disadvantage in the global marketplace. The current tax system has also created an uncertain environment that consistently undermines our manufacturers’ ability to compete and succeed in the global marketplace.
Tax extenders passed at the end of the 113th Congress provided a short-term fix for a number of important provisions affecting manufacturers, but these extenders are not a solution going forward, since they expired at the end of 2014. This exemplifies the problems inherent in addressing corporate taxation on a piecemeal basis. ACA urges policymakers to act in a more comprehensive manner in order to create a tax climate that encourages innovation and promotes investment, job creation and economic growth.
This Issue Backgrounder focuses on the key ingredients for comprehensive tax reform, which include:
A lower corporate tax rate;
- Equitable treatment of small businesses;
- Encouraging investment by making permanent a competitive R&D tax credit;
- A modern international tax system that does not contain disincentives to U.S.-based manufacturing; and
- A robust capital cost-recovery system.
Manufacturers are also concerned about the impact of historically-high levels of the current federal deficit and the debt on the overall U.S. economy but simultaneously want to avoid government shutdowns or default. The nation is, once again, poised to reach its borrowing limit in 2015 and the path towards raising the debt ceiling is unclear. ACA urges Congress to pass a balanced budget while continuing to meet its current obligations.
CORPORATE TAX RATE
The corporate income tax rate in the United States is considered by most observers to be the highest in the developed world. This high rate, along with the way in which the U.S. government taxes corporate taxpayers on global income, acts to make the United States less competitive as a place to do business and invest. The U.S. rate of combined corporate taxation has been 39% for years; in contrast, the Organization for Economic Cooperation and Development (OECD) average has gradually declined to approximately 24.1% — over 33% lower than the U.S.’s statutory rate.4 Our neighbor Canada, to name one example, taxes corporate income at a 26.5% rate. Although the effective tax rate is somewhat lower due to credits, deductions from taxable income, etc., the United States’ effective corporate rate is 27.9%.5 That’s considerably
higher than Canada’s (6.6%), second-highest (behind New Zealand) among OECD countries, and 15th-highest among 189
countries measured.6 Manufacturers are even more disadvantaged: one study found that the “current tax expense” for all U.S. corporations (both domestic and multinational) was 20%, while the equivalent rate for manufacturers was 26%.7
EQUITABLE TREATMENT OF SMALL BUSINESSES
Many small manufacturers are not taxed under the corporate taxation system, but rather, are taxed under Subchapter S of
Chapter 1 of the Internal Revenue Code.8 ACA and other business organizations believe that the tax code should neither advantage nor disadvantage such corporations solely because of their choice of tax regime. One aspect of the taxation of such corporations that ACA believes Congress should consider modifying is how the tax code treats business investment. Currently, small and medium-sized businesses can expense modest levels of investment under Section 179. This has varied over recent years and has created some level of uncertainty. For example, in 2013, such expensing was limited to $500,000, with a $2 million phase-out threshold. The level of qualified investment dropped to $25,000, although in 2014, the $500,000 limit was reinstated on a retroactive basis. Encouraging investment by a more generous level of expensing would likely increase investment and employment by small and medium-sized manufacturers.9
ENCOURAGING INVESTMENT BY MAKING A COMPETITIVE R&D TAX CREDIT PERMANENT
The Research & Development (R&D) credit has not been made a permanent part of the tax code, although it has typically been extended by Congress in various legislative “extender” packages. It is highly inefficient to continue to deal with this issue on a last-minute, ad hoc basis, particularly as the merits of this credit are well understood. One study found that “the credit and its enhancement is estimated to increase research-related employment by 140,000 in the short term and 300,000 in the long-term.” We know that there is significant global competition for these R&D jobs, and companies have a wide number of choices on where to place these positions and invest their research dollars. Particularly in light of the generally lower prevailing costs associated with employing research scientists in developing countries, it makes no sense to further handicap U.S. research efforts by periodically threatening this credit. ACA urges Congress to make the R&D tax credit a permanent part of the tax code.
A MODERN INTERNATIONAL TAX SYSTEM THAT DOES NOT CONTAIN DISINCENTIVES TO U.S.-BASED MANUFACTURING
ACA believes that, until Congress moves to a territorial tax system and lowers the rate so U.S.-based firms can compete with global competitors, the U.S. tax system will continue to be an impediment to creating jobs in the United States.10 The current system of worldwide taxation of income – a corporate taxation feature unique to the United States – provides strong incentives for U.S.-based multinationals to defer repatriating overseas earnings to the United States and injects many other distortions. There are a number of examples of so-called corporate inversions, where previously U.S.-based corporations acquire a foreign entity and subsequently move their headquarters overseas to avoid this feature of the U.S. tax code. Because a significant number of multinational corporations operate in our industry, the current system acts as an unnecessary drag on U.S.-based multinational corporations. The positive impact on the U.S. economy of implementing a territorial system could be as high as $114 billion per year in increased repatriated earnings, which could generate significant amounts of increased investment and employment among affected U.S.-based firms. This could generate increases of about $22 billion in GDP, approximately $11 billion in new investment, and increased employment of as much as 154,000 jobs.11
A ROBUST CAPITAL COST-RECOVERY SYSTEM
Increased ability to expense or depreciate capital investments provides an incentive for increased expenditures in this area, with clear and positive impacts on employment and productivity. This is a highly technical area of tax policy and a number of proposals have been advanced addressing how corporations may expense or depreciate capital expenditures. The National Association of Manufacturers has examined a number of such proposals closely, and a study it commissioned concluded that “full and permanent expensing would increase annual GDP by 0.35%, investment by 1.2%, and employment by 0.05% (or approximately 74,000 to 79,000 jobs per year).”12 ACA agrees with this conclusion and encourages Congress to consider enhancing the current incentives for investment by U.S. corporations.
For More Information: Contact ACA’s Allen Irish, Director of Industry Affairs and Counsel, at firstname.lastname@example.org or
1 Sperling, Gene. “Believe It or Not, Corporate Tax Reform is Doable in 2015,” The Wall Street Journal, 8 Oct. 2014, Op. Ed.
2 Lange, Jason. “Obama administration pushes business tax reform in Congress,” Reuters, 3 Feb. 2015.
3 Barro, Josh. “Corporate Tax Reform: Focusing on Where the Money Is, Not Where the Jobs Are,” The New York Times (originally published on Feb. 5, 2015, on page B3 of the New York edition with the headline: “Tax Reform with Focus on Where Money Is.”)
4 KPMG, Tax Rates Online, http://www.kpmg.com/Global/en/services/Tax/tax-tools-and-resources/Pages/tax-rates-online.aspx.
5 “Paying Taxes 2014: The Global Picture. A Comparison of Tax Systems in 189 Economies Worldwide,” Pricewaterhouse Coopers International Ltd.
7 Markle and Shackelford, “Cross-Country Comparisons of Corporate Income Taxes,” National Tax Journal, September 2012.
8 A “small business corporation” may elect under 26 U.S.C. 1362(a) to be taxed as an S corporation.
9 A June 2014 study by Tax Foundation suggested that the expensing system would provide the strongest effects on economic growth of any proposal they evaluated, with significant long-term impacts on GDP, the capital stock, and employment (Schulyer, Michael “Comparing the Growth and Revenue Effects of Four Proposed Depreciation Systems: Baucus, Camp, Wyden, and Full Expensing,” www.taxfoundation.org, June 2014).
10 This is currently exacerbated by the recent strength of the U.S. dollar, which shows no signs of reversing for the foreseeable future.
11 Drabkin, Serwin, and Tyson “Implications of a Switch to a Territorial Tax System in the United States,” Berkeley Research Group Working Paper, November 2013.
12 Bruce, Gurley-Calvez, and Murray, “A Missed Opportunity: The Economic Cost of Delaying Pro-Growth Tax Reform,” Report Commissioned by National Association of Manufacturers, January 2015.