The Need for Corporate Tax Reform

The US corporate tax system is broken – period. This is one of the few issues that both the left and the right actually agree on. For those that are not familiar with our corporate tax system, this Bloomberg article is a good read. The key takeaways are summarized below:

  1. The top US corporate tax rate of 35% is the highest of any industrialized country in the world. This makes the US less competitive relative to other countries when multinational companies are making investment decisions on where to allocate their capital.
  2. Corporate profits are taxed twice – once at the company level and again at the dividend level. Double taxation punishes successful businesses when they turn a profit.
  3. Companies are incentivized to “invert” to pay a lower tax rate. This entails merging with another company in a lower tax rate country and moving the official headquarters there, thus paying less taxes. Pfizer and Burger King are examples of companies that inverted to save hundreds of millions of dollars in taxes – moves that resulted in less US jobs and tax revenue.
  4. Since repatriated cash is double taxed at the full rate, companies are storing over $2 trillion of cash overseas to avoid the tax impact. This $2 trillion could potentially be brought back and invested in the US economy.

Based on the points mentioned above, here are some suggested common sense proposals on how to reform the corporate tax system.

  1. Reduce the top corporate tax rate to 20% to be more competitive with other countries.  25% is the average corporate tax rate for developed countries.
  2. Allow companies to repatriate cash back to the US at a reasonable rate where they are not fully double taxed
  3. Provide tax incentives for companies to use repatriated cash for capital investments in lieu of share buybacks or dividends

These proposals would make the US economy more competitive and encourage companies to invest and hire in America.  In addition, the government might actually collect more tax revenue – as the saying goes, 20% of something is better than 35% of nothing.  Ultimately, corporate tax reform would be a win-win-win for the government, corporations, and American workers.

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