Business Roundtable Urges Corporate Tax Reform
March 16, 2015
The Business Roundtable recently urged a reform of federal corporate tax policy, and John Engler, president of the industry representative, presented this view to Washington lawmakers on March 11.
During a Senate hearing about balancing the federal budget, Engler, a former governor of Michigan, emphasized the importance of pro-growth policies.
Corporate Tax Policy
The former governor warned that if the federal government keeps generating deficits, such a situation will have an adverse impact on economic conditions. With this concern in mind, he pointed out flaws he perceives in the current corporate tax policy and offered some solutions.
Engler specifically stated that U.S. companies have a harder time expanding in the global economy because of the nation’s corporate tax system, and that this situation undermines the labor market, wages and investment in the world’s largest economy.
In addition, U.S. tax policy prompted a large number of foreign companies to purchase American businesses, according to a study released by the Business Roundtable March 10. This research, conducted by EY, evaluated more than 25,000 cross-border merger and acquisitions.
The accounting firm compared the differing outcomes of using the corporate income tax rates that existed between 2003 and 2013 and a rate of 25 percent, the average of The Organisation for Economic Co-operation and Development nations.
The research found that if the U.S. tax code had used the lower rate during this period, U.S. companies would have purchased $590 billion in cross-border assets as opposed to losing $179 billion worth of these assets.
The difference between the two figures is $769 billion, which represents the amount of assets American businesses have lost because of the tax policy used at the time. In addition, the report estimates that if the nation had used a 25 percent corporate income tax rate, doing so would have resulted in 1,300 companies remaining in the U.S. during the last 10 years.
Amid all these figures, Engler lamented the outflow of key resources he believes have stemmed from current income tax treatment of companies based in the world’s largest economy. As a result of these policies, the U.S. has become “a net exporter of headquarters, valuable assets and startup technologies,” he said in a statement released along with the results of the EY study. “We’ve got to reverse this trend.”
To fix the situation, Engler suggested taking two key steps. For starters, he proposed lowering the corporate income tax rate at 25 percent, which he contended would be more competitive than the current policy.
Secondly, he suggested adopting a “territorial” system of taxation, which would stop penalizing the repatriation of foreign earnings to the U.S. once and for all. In addition, this proposed system would eliminate any taxation of the active foreign earnings of American companies over and above the foreign taxes paid.
By doing so, Engler contended the U.S. federal government would align its tax policy with that of its largest trading partners.
Experts weigh in
While Engel has claimed that existing corporate income tax policy is undermining U.S. business conditions, some experts contend the accounting firm’s analysis oversimplifies the situation, The Wall Street Journal reported. According to these pundits, the impact that such policies have on U.S. companies is uncertain.
A perfect example of how the tax code can encourage American companies to buy foreign firms is the current treatment of repatriated earnings, according to the news source. Under existing policy, firms need to pay income taxes on any earnings they produce overseas and then bring back home. As a result, companies can either leave these resources overseas or use them to purchase companies based in foreign nations.
Impact of US dollar
Another variable that could have easily affected M&A over the last decade or so is fluctuations in foreign exchange rates. While the U.S. dollar has made a strong recovery over the last year, it was trading lower against many other currencies for a large majority of the last 10 years.
Many foreign companies took advantage of the weaker dollar, using it to take advantage of cheaper deals on American companies. This development spurred some robust M&A activity for firms based overseas.
While the statements that Engler made before Washington lawmakers – and EY figures he cited – may combine to create what looks like a compelling case, the actual situation may be far more complicated.