U.S. corporate income tax law puts the country at a disadvantage relative to many others, resulting in slower economic growth, lost tax revenue, capital flight and fewer jobs, economist Aparna Mathur wrote in a recent Forbes article. The nation has an urgent need for reform and it is important that policy makers not let the many different opinions on what the tax code
should be hinder meaningful reform, said Mathur, a resident scholar at the American Enterprise Institute.
The U.S. has fallen behind other countries by failing to reform its tax code, acting only to reduce marginal tax rates on corporate income only a handful of times in the last two decades, she noted. Comparatively, the other nations have cut their marginal corporate tax rates significantly in an attempt to attract more robust investment. More importantly, many nations asset taxing jurisdiction on a territorial basis and avoid the complexity of the U.S. system of world-wide taxation, tax credits, controlled foreign corporation rules and Subpart F income.
The impact of this failure to keep up is that the world's largest economy misses out on potential investment, said Mathur. She cited one study, "The effect of corporate taxes is on investment and entrepreneurship," which used data for first- and fifth-year corporate income tax rates for 85 countries.
The research found a definite relationship between corporate investment and entrepreneurship and the effective tax rates of companies. Manufacturing in particular suffered a decline in investment when effective corporate income tax rates were higher.
Urgent need for change
Many policy makers have pointed to this situation, complaining that the U.S. is bleeding opportunity because its tax code is subpar. President Barack Obama and Rep. Dave Camp, R-Mich., have both proposed plans to reform the nation's treatment of corporate income taxes. Sens. Marco Rubio, R-Fla., and Mike Lee, R-Utah, have also supplied their own joint proposal.
One trend that has helped generate significant support for efforts to reform the tax code is the existence of tax inversions. Amid concerns that the incidence of these inversions might arise, Obama directed the U.S. Department of the Treasury to create a new set of rules that would lessen the benefit of these legal maneuvers or halt them altogether, Mathur noted. Most of the growth in the coming years will be in the Asia-Pacific region and many inverting companies are attempting to restructure so earnings may be handled more tax efficiently than with repatriation.
However, while some might point their finger at the companies taking this step, many economists have emphasized that it is not the firms that are at fault, but an ineffective tax code, the author wrote. While all these challenges may seem troubling, they are helping fuel an urgent need for reform. As a result, there is widespread agreement that such change is needed; however, disagreement remains on the type of change to be undertaken.