To manufacturers’ dismay, yesterday the President used a campaign speech to lambast an idea supported overwhelmingly by the nation’s business community and one which has been adopted by the overwhelming majority of industrialized countries – a territorial system of taxation.
Today the U.S. is one of only 6 OECD countries to tax domestically headquartered companies on their worldwide income. Along with Chile, Ireland, Korea, Mexico and Poland, the U.S. taxes the foreign earnings of companies when they bring their foreign income home. This double taxation acts as a disincentive for companies to return the income to the U.S. for investment because after paying corporate taxes in the country where the income is earned, they have to pay a second layer of tax once they return the income to the U.S.
This results in companies – seeking to get the best bang for their buck – keeping their income abroad in order to get more out of the funds they have to invest. And critical to this whole discussion is that the U.S. holds the dubious distinction of having the world’s highest corporate tax rate at 35 percent unlike the other 5 OECD countries that continue to use the worldwide system of taxation which have lower corporate tax rates.
Yet somehow, despite criticism our antiquated worldwide system of taxation from much of the academic community and a number of the President’s own advisors including the majority of President’s Export Council and his Council on Jobs and Competitiveness, the President continues ignore to today’s competitive worldwide economic environment in which global companies compete. Today 95 percent of the world’s consumers live outside of the US and in order for US companies to reach many of those consumers, or to feed into supply chains for these consumers, companies need to have a local presence to manufacture their products for these foreign markets. And these foreign operations are linked to U.S. investment as well. The President’s Export Council Chairman, Boeing CEO Jim McNerny in a letter to the President in December 2010 said, “expansion abroad by US companies is vital for establishing export platforms for US-produced goods and expanding the scope of domestic investments in research and other high-paying headquarters’ operations.”
The Congress needs to move past the rhetoric and the distorting claims on the campaign trail and take up comprehensive tax reform which includes a move to a territorial system of taxation for our nation’s multinational corporations. Manufacturers were pleased last fall when House Ways and Means Chairman Camp released a draft proposal for moving toward such a system. While we had some questions, concerns and input for the Committee’s consideration, we applaud the Chairman’s process of putting out a draft and his commitment to moving the US tax code to a system that makes sense in today’s worldwide market and we hope to see more leadership on this critical issue from other key players.