Tax Foundation Releases Top Ten Lists on Corporate Tax Reform

May 11, 2011

Ten Benefits of Cutting the Corporate Rate and Ten Reasons to Move to a Territorial Tax System

Washington, DC, May 11, 2011-With the House Ways and Means Committee scheduled to hold a hearing on the need for comprehensive tax reform tomorrow, the Tax Foundation is releasing two new studiesTen Benefits of Cutting the U.S. Corporate Tax Rate and Ten Reasons the U.S. Should Move to a Territorial System of Taxing Foreign Earnings. Ways and Means Committee Chairman Dave Camp announced earlier this week that Thursday's hearing would focus on how comprehensive tax reform can help spur job creation in the U.S. and make American businesses more competitive in the global economy. 

"There is wide consensus among policymakers that the U.S. corporate tax system is out of line with most industrialized nations—and that America's global competitiveness is suffering as a result," said Tax Foundation President and study author Scott A. Hodge. "A corporate tax reform package that significantly lowers the federal rate and moves us toward a territorial system—in which foreign profits are taxed only once -—would promote long-term economic growth and higher living standards for all Americans."

Both the Economic Recovery Advisory Board, chaired by Paul Volcker, and the National Commission on Fiscal Responsibility and Reform, co-chaired by Erskine Bowles and Alan Simpson, have made the case for cutting corporate tax rates as a part of a comprehensive reform effort. The Bowles-Simpsons report acknowledged that U.S. corporate income tax rates are significantly above the average for industrialized world, putting U.S.-based companies at a distinct competitive disadvantage.

Summary list from Ten Benefits of Cutting the U.S. Corporate Tax Rate. Full study available here.

 Ten Benefits of Cutting the U.S. Corporate Tax Rate

1. Cutting the corporate tax rate will promote higher long-term economic growth.

2. Cutting the corporate tax rate will improve U.S. competitiveness.

3. Cutting the corporate tax rate will lead to higher wages and living standards.

4. Cutting the corporate tax rate will boost entrepreneurship, investment, and productivity.

5. Cutting the corporate rate lowers the tax burden on low-income taxpayers and seniors.

6. Cutting the corporate rate will lower the overall dividend tax rate and taxes on capital.

7. Cutting the corporate tax rate can attract foreign direct investment (FDI).

8. Cutting the corporate rate would lead to lower corporate debt and reduce the incentives for income shifting.

9. Cutting the corporate tax rate can reduce compliance costs.

10. Cutting the federal corporate rate can help the states compete globally.

In addition to being subject to the second-highest corporate tax rate in the world, U.S. businesses must also operate under a worldwide tax system, in which business income is taxed no matter where it's earned—even if it is income from foreign operations that has already been taxed for a foreign government. The worldwide system saddles American companies with a greater financial burden and distorts their financial planning. A territorial system—like the ones in place in most other developed countries—would allow foreign profits to be taxed by foreign governments while only subjecting domestic profits to U.S. tax rates.

Summary list from Ten Reasons the U.S. Should Move to a Territorial System of Taxing Foreign Earnings. Full study available here.

 Ten Reasons the U.S. Should Move to a Territorial System of Taxing Foreign Earnings

1. Parity. The U.S. system must be aligned with our global trading partners.

2. The Experiences of Japan and Great Britain are lessons for the U.S.

3. The premise of the worldwide tax system - capital export neutrality (CEN) - is obsolete when subsidiaries have access to global capital markets and can self-fund their expansion with retained earnings.

4. The worldwide tax system violates the benefit principle of taxation.

5. The U.S. maintains a territorial tax system for foreign-owned companies but a worldwide system for U.S. companies. Mov­ing to a full territorial system will level the playing field.

6. The compliance cost of the current system is excessively high relative to companies' foreign activities and the revenues raised from taxing foreign-source income.

7. Our current system traps capital abroad - the "lockout" effect.

8. Our high corporate tax rate and worldwide system makes it cheaper for companies to take on debt rather than use their own profits to fund their growth.

9. The current system dissuades global companies from headquartering in the U.S.

10. Eliminating deferral nearly killed the U.S. shipping industry.

"As President Obama said in his State of the Union Address, Washington's goal should be to make the U.S. a competitive place to do business in and do business from," said Hodge. "The U.S. corporate tax system undermines both of these goals. Thus, the key to making the U.S. more competitive globally is to put our tax system on par with our major competitors. This means dramatically cutting the U.S. corporate tax rate while moving toward a territorial system for taxing foreign earnings."

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