Memo to Policy Makers: On Tax Reform, Help Me Help You

Robert Hoffman Contributor
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It is said that political campaigns are about fueling conflict, but governing is about finding common ground.  Well, I am in the common ground business, which means I am determined to identify bipartisan ideas to revitalize the U.S. economy and create jobs.

Fortunately, there is common ground on many pro-growth policies important to the U.S. high-tech industry. Normal trade relations with Russia; green cards to entice talented foreign nationals to innovate in the U.S.; investments in basic research that startup new businesses; protection of the privately-led management of the Internet – all have bipartisan support.

The President and Governor Romney even agree on a lower corporate tax rate — the Big Kahuna of corporate tax reform.  And they’re right.  The U.S. is the only advanced economy that hasn’t lowered its corporate rate in the 21st century, and today has the highest statutory rate – a rate ten percentage points higher than the average among advanced economies.

A lower corporate tax rate is clearly in Camp Common Ground because it is essential to revitalize a job-creating U.S. economy over the long-term.  Yet, in his convention speech, Vice President Joe Biden opted for Camp Contrast, dismissing a so-called territorial tax as a “new idea” from Governor Romney that is bad for the economy.

Let’s clear a few things up: First, a territorial or market-based tax system is not new — most advanced economies that compete with the U.S. for jobs and investment use it; second, yes, Governor Romney supports it, but so do many experts and other leaders in business and government; and third, a modern, market-based tax system with a lower corporate rate is essential to help U.S.-anchored companies succeed globally, while creating good jobs here locally.

A little corporate tax 101 by way of background:  Based on laws enacted in 1962, if a U.S.-based company establishes operations in other countries to produce and sell goods and services, the profits from those sales are subject to tax in the U.S., as well as in the countries where they are earned.  This sounds misleadingly fair because it assumes our foreign competitors also play by our 1962 rules.  Not true.  Many advanced economies operate under a modern set of rules, and impose little or even no taxes on their home companies’ foreign earnings.  Tax geeks call this a “territorial” tax system because corporate taxes are imposed on earnings only by the countries where the sales were made.

Territorial or market-based systems are designed to encourage domestic companies to invest their foreign earnings at home in R&D, headquarters operations and other purposes.  Put another way, a market-based system incentivizes domestic companies to invest locally from the success they’ve achieved globally.

So it’s no surprise that developed countries responded to economic globalization by opting for a market-based tax system.  It’s the global norm.

What is surprising is that the U.S. tax system remains an outdated global outlier, placing U.S.-based companies and the U.S. economy at a costly disadvantage.  Unlike many foreign competitors, U.S. companies effectively face double-taxation on their foreign earnings.  In addition, the outdated U.S. tax system punishes the U.S. economy because it imposes significant barriers on U.S.-anchored companies to invest global earnings in the U.S., which is why roughly $1.7 trillion in global earnings of U.S.-anchored companies sit offshore.

It’s even more surprising the Vice President would reject a market-based tax system out of hand and label it Governor Romney’s “new” idea, especially when bipartisan, public-private organizations have endorsed this not-so-new idea, including President George W. Bush’s Advisory (and bipartisan) Panel on Federal Tax Reform; President Obama’s National (bipartisan) Commission on Fiscal Responsibility and Reform (aka the Simpson-Bowles Commission) and Export Council; and majorities of President Obama’s Economic Recovery Advisory Board and Council of Jobs and Competitiveness.

We should be discussing, not dismissing, serious ideas on modern, competitive, simplified tax systems that would put the U.S. economy and U.S.-based companies on a level global playing field. That’s why the chief tax writer in the U.S. House of Representatives, Rep. Dave Camp (R-MI), has put forward several market-based options.  The Senate’s leader on tax reform, Sen. Max Baucus (D-MT), has also recognized that a market-based system can help U.S.-based global companies and the U.S. economy succeed at creating jobs.

The Vice President suggested that experts believe a market-based system would harm the U.S. economy, but an extensive study by the nonpartisan Tax Foundation found no direct relationship between a market-based tax system and reduced jobs and investment.

Look at Japan, which recently scrapped a broken tax system strikingly similar to ours for a market-based system and a gradual reduction in its corporate rate.  Since enactment, Japan has seen a surge in global investment, falling unemployment, rising wages, and increased corporate tax receipts.

We can’t give credit alone to tax reform for Japan’s economic revival, but the Tax Foundation correctly noted that we have not seen the parade of horribles some fear in a market-based system.  Even a member of the Japanese House of Representatives said “the U.S. must surely know that its hesitancy to do these things is handing the advantage to its international competitors.”

Again, I am in the common ground business.  As a long-time advocate for the tech industry, I am all for policy solutions that advance my industry and country.  All I can do is recommend ideas to policymakers, and all too often, I feel like Jerry McGuire when he implores the stubborn Rod Tidwell to “help me help you.”  So, when the political season ends and we return to the business of governing, let’s not quickly dismiss compelling ideas out of hand, but instead, work together to help my industry help policymakers help the U.S. economy.

Robert Hoffman is Senior Vice President of Government Relations at the Information Technology Industry Council. Over a 25 year period, Robert has been a public policy advisor for four US Senators, the Governor of California, and two Fortune 500 enterprises. 

Robert Hoffman