When it comes to creating a competitive business environment, the United States already faces an uphill climb thanks to our outdated corporate tax policies. What many Americans may not realize is that things are about to get much worse.
The United States corporate tax rate of 35 percent is the highest among developed nations, and has prevented many American companies from bringing their international earnings home. Now, foreign governments are eyeing these earnings with plans to impose their own taxes on it. Even worse for the American economy, these countries are readying new policies designed to lure American innovation, earnings and jobs overseas.
On Monday, the Organization for Economic Co-operation and Development issued new international tax recommendations under its Base Erosion and Profit Shifting (BEPS) project. BEPS is expected to have numerous impacts, but there are two that should concern most Americans.
First, it will make it easier for foreign countries to levy higher taxes on American companies. More than $2 trillion of American capital is now being held overseas thanks to our country’s punitive corporate tax code. That capital could be brought home to invest in American jobs, but now stands to help fill the coffers of foreign governments.
Second, the BEPS process will create new restrictions on “innovation box” tax policies that will result in American companies moving R&D investments and jobs overseas. Under an “innovation box”, companies are given lower tax rates on money earned off their own intellectual property. But under BEPS, companies using these lower rates must locate their R&D investments and jobs in the country offering the “innovation box.”
The United States does not currently offer an “innovation box” policy, meaning other countries are going to be much more attractive places to locate R&D. Innovative, economic leaders like high-tech, manufacturing, and biotech companies will soon have little choice but to look at relocating key investments or risk falling behind their international competitors.
House Ways and Means Chairman [mc_name name=’Rep. Paul Ryan (R-WI)’ chamber=’house’ mcid=’R000570′ ] understands the dilemma clearly. In response to BEPS he called on Congress to swiftly respond saying, “There is never going to be a perfect time to fix the tax code, but stalling for so long got us into this problem. We can’t afford to wait any longer.” Ryan is right.
The United States cannot wait to address the deficiencies of our international tax policies. BEPS policies will begin going into effect next year. Every month Congress waits on international tax reform, more American earnings and American jobs will be lost overseas.
By enacting our own innovation box policy, the United States can counter the moves being made by foreign countries and reassure American companies that our government is committed to future investments and job growth.
Chairman Ryan has expressed support for making these changes this year. He has been joined by Senators [mc_name name=’Sen. Rob Portman (R-OH)’ chamber=’senate’ mcid=’P000449′ ] and [mc_name name=’Sen. Charles Schumer (D-NY)’ chamber=’senate’ mcid=’S000148′ ], and Representatives Charles Boustany and [mc_name name=’Rep. Richard Neal (D-MA)’ chamber=’house’ mcid=’N000015′ ], who are helping to lead bipartisan efforts in the Senate and House respectively. These leaders recognize that the changes happening globally are going to hurt us locally if we don’t move now.
Corporations are going to invest in innovation and pay taxes. The question is – will they do it here in the United States or in other countries? The actions of Congress in the next few months will determine that answer.