The good news today coming out of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations is that Sen. Carl Levin (D-MI) recognizes that something is wrong with our international tax system. The problem though is that his focus is on companies that actually pay taxes and not the tax code itself, which is in desperate need of reform.

The basic problem is fairly simple: U.S. tax laws make it difficult for U.S. companies with worldwide operations to compete. Our “worldwide” system taxes income regardless of where it is earned, unlike most other developed nations that only tax income earned within their borders. As a result, U.S. multinationals generally have a higher tax burden than non-U.S. multinationals — a significant disadvantage when U.S. companies are competing against non-U.S. multinationals and local firms for business in a global marketplace. And, if U.S. companies cannot compete abroad, where 95 percent of the world’s consumers are located, the U.S. economy suffers from the loss of both foreign markets and domestic jobs that support foreign operations.

That’s why the NAM strongly supports moving from the current worldwide tax system to a territorial tax system structured to enhance U.S. competitiveness, not raise revenue. The current focus on tax reform presents a great opportunity to advance a permanent territorial system that would go a long way to improving the global competitiveness of U.S. manufacturers.

Let’s face it, territorial systems are now the international norm. The vast majority of our trading partners have a territorial system of taxing foreign income. Japan and the United Kingdom—two of the largest economies—recently abandoned worldwide taxation systems in favor of a territorial approach. Adopting a tax system that is not more burdensome than the tax systems applying to foreign manufacturing companies is critical to the ability of U.S. manufacturers to compete in the global marketplace. A competitive tax system will impact jobs at U.S. headquarters, increase exports from U.S. manufacturers and improve the efficiency of their supply chains.

American manufacturers are focused on investment, expansion and job creation.  One important way to do this is by expanding their customer base. And, with 95 percent percent of the world’s population outside the United States, it is not surprising that American companies are looking at markets outside the United States.  More business translates into more jobs and stronger companies.  So why is the Administration so intent on punishing companies that operate in the global market place?  A new video from the Tax Foundation explains in simple terms how overseas business benefits U.S. companies and their workers and how, in contrast, misguided U.S. tax policies make it much harder for them to compete.

Excellent discussion of U.S. corporate taxes by Veronique de Rugy Wednesday at NRO’s The Corner, “How Punishing Is the Corporate Income Tax?” The Mercatus Center research fellow addresses the issue often raised by critics of U.S. businesses, that yes, the U.S. corporate tax rate is high, but corporations take advantage of exemptions and deductions. It’s a legitimate issue to raise but should not be considered independently of the U.S.’s reliance on a worldwide tax system.

As it turns out, the U.S. not only imposes high rates, it also taxes corporations on a worldwide basis: Profits made by an American-owned computer plant are subject to U.S. taxes whether the plant is located in Texas or Ireland. Most major countries don’t tax foreign business income. In fact, about half of OECD nations have “territorial” systems that tax firms only on their domestic income.

De Rugy then raises an issue we were unfamiliar with, that is, studies that show a correlation between higher corporate tax rates and lower wages.

In recent years, several much-discussed studies have found that it is likely that much of the burden of the tax is borne not by capital but by domestic labor, in the form of lower wages. For instance, this December 2010 paper by economists Aparna Mathur and Kevin Hassett shows the link between corporate tax rates and the average manufacturing wage (in U.S. dollars) for 65 countries over a period spanning 1981–2005. They find that there is a clear negative link between the two, suggesting that higher corporate tax rates lead to lower worker wages. They test this theory using regressions controlling for a bunch of other factors, and find that a 1 percent increase in the corporate income tax leads to an almost 0.5–0.6 percent decrease in hourly wages.

This is consistent with the results of many recent empirical papers — Arulampalam et al. (2007) , Mihir A. Desai, C. Fritz Foley, and James R. Hines (2007), Felix (2007) — that use real-world data to look at who really pays the corporate income tax. These studies find that between 45 and 70 percent of the cost of the corporate tax is borne by labor rather than shareholders.

Very informative, timely piece.

Chairman Jay Rockefeller (D-WV) presided over a quick but informative committee hearing Wednesday, “The Future of American Manufacturing: Maintaining America’s Competitive Edge.” (We judge an hour to be quick by hearing standards; Senators had to go to the floor to vote on the two-week spending bill.) Sen. Rockefeller’s opening statement is here.

Rep. Steny Hoyer, the House Democratic whip, gave a statement, and Commerce Secretary Locke read a statement and answered questions.

Senators’ comments were on a broad range of questions, and informatively so. Sen. Olympia Snowe (R-ME) pressed Secretary Locke to reconcile the Administration’s ostensible call for more reasonable regulations with the EPA’s new Boiler MACT rule, which will impose heavy costs on her state’s pulp and paper industry. The Secretary explained that the EPA rule on industrial boilers, in response to a court order, had been scaled back after public comment. In other words, “Could have been worse!”

Sen. Maria Cantwell (D-WA) discussed the importance of “lean” manufacturing as a key to global competitiveness. (The context was Boeing’s recent winning of the Air Force contract to build refueling tankers.) It’s not often we hear an elected official speak on “lean,” but it’s definitely an important advance for many U.S. manufacturers.

Sen. John Boozman (R-AR) hit the mark with his comments on overregulation and global tax competitiveness. He started by observing: “In Arkansas, the name of the game right now, and really throughout the country, is jobs, jobs, jobs.”

My manufacturers feel like they’re getting killed with regulation, whether it’s Boiler MACT or this or that, just numerous things coming down that are creating so much uncertainty, that the last thing in the world they’re doing is thinking about hiring people. So we have to have some certainty…

Other things like: Lots of manufacturers that are very successful with what they produce, and they’re building manufacturing facilities overseas to service the area there, to keep the transportation costs [down] and then again, having the inability to bring those profits home. And so, in not bringing them home, pretty soon they say, well, we need to spend that money and they start expanding those plants, and before you know it, the decision’s made to actually move over there.

A video clip of the Senator’s comments is on his Facebook page.

We really appreciate a Senator who understands and explains the practical consequences of the U.S. system of global taxation, which discourages repatriation of overseas earnings.

Kevin Hall, McClatchy, “Business leaders wary of Obama’s plan to cut corporate tax rate“:

“Do I think it can be done? Yes. But it’s going to be very painstaking, it’s going to be difficult,” said Dorothy Coleman, the vice president of tax policy for the National Association of Manufacturers. “If it was easy, it would have been done a long time ago.”…

“I think our overall feeling on corporate tax rates is they should be as low as possible,” said NAM’s Coleman. She offered only a qualified endorsement because Obama said the lowering of corporate tax rates can’t add to the deficit, projected Wednesday by the nonpartisan Congressional Budget Office to hit a record $1.5 trillion this year.

“We support fiscally responsible tax reform, but starting from the beginning, that it’s got to be revenue neutral almost by definition means creating winners and losers,” Coleman said. “When you target one industry over another, that changes the conversation.”

USA TODAY, “Corporate tax rates beg for cut but reform tough to achieve, “Scott Hodge, head of the non-profit Tax Foundation, says tax reform is likely this year because Japan is slated to cut its corporate tax rate in April, giving the U.S. the highest rate. ‘We’ll have to do something,’ he says.”

Hodge covered the Japanese developments in a blog post last month, reporting that the cabinet of Prime Minister Naoto Kan had OK’d reducing the corporate tax rate by 5 percentage points, a move expected to be finalized when the Diat approves the government’s budget this spring.

Hodge also addresses the impact of the worldwide tax system — which the United States continues to use — versus the territorial tax system. (continue reading…)

The Senate voted to invoke quorum on H.R. 2847, the Jobs for Main Street Act, on Monday by a vote of 62-30.

If the one-time tax credits for hiring accomplish anything it’s, uh, Jobs for Main Street!

Which is to say that a temporary, small credit for hiring an employee will hardly change an employer’s behavior, other than to perhaps prompt the filing of a form to qualify for the credit after the hiring of a worker who would have been hired in any case.

Congress should think about the big picture, beyond the 2010 elections. As the Tax Foundation concludes in a new special report, “The Importance of Tax Deferral and A Lower Corporate Tax Rate“:

Key Findings
• The United States is the only large economy that taxes corporate income worldwide with a tax rate exceeding 30 percent.
• During 2009, both Great Britain and Japan enacted territorial systems, giving their multinationals a major tax advantage over U.S.-based firms that are saddled with a worldwide system. Over 80 percent of developed nations now have territorial systems.
• Whether the U.S. moves to strengthen its worldwide system by repealing deferral or follows the international trend by adopting a territorial system, there will be unfortunate incentives created. In both cases, though, lowering our corporate tax rate will mitigate them.
• A reasonable upper-bound target might be a combined federal-state rate of roughly 25 percent, implying a federal corporate tax rate of roughly 20 percent.

These findings reinforce the NAM’s new economic analysis conducted by the Milken Institute, “Jobs for America,” which examined the U.S. corporate tax rate:

Reducing the U.S. corporate income tax rate to match the OECD average would trigger new growth. By 2019, it could boost real GDP by $375.5 billion (2.2 percent), create an additional 350,000 manufacturing jobs, and increase total employment by 2.13 million.

Two million jobs, eh? That’s a lot more than any temporary employment credit will ever achieve.

See also our NAM news release, “Manufacturers Disappointed with Senate Jobs Bill; Bill Doesn’t Go Far Enough to Create Jobs”