The Honorable Valerie B. Jarrett
Senior Advisor and Assistant to the President for Intergovernmental Affairs and Public Engagement
1650 Pennsylvania Avenue, NW
Eisenhower Executive Office Building
Washington, DC 20501

The Honorable Lawrence H. Summers
Director, National Economic Council
1650 Pennsylvania Avenue, NW
Eisenhower Executive Office Building
Washington, DC 20501

Dear Valerie and Larry,

Thank you for your July 12 letter. Business Roundtable shares with the President the goal of substantially increasing the competiveness of American companies and workers. We appreciate the opportunity to explore with the Administration changes in the corporate tax structure that would serve to achieve that objective by increasing U.S. employment in the near term and putting the country on a strong path for future economic growth by promoting capital formation, which is one of the most fundamental conditions for increased competitiveness. It is also important to recognize the need to provide competitive tax policies for all American companies and their workers. Large U.S. worldwide companies and small and medium-sized companies rely on each other to grow and to create new jobs. It is essential that tax policy changes be designed with the objectives of competitiveness, job creation and economic growth.

America also faces significant fiscal challenges in the years ahead, and Business Roundtable remains committed to working with the National Commission on Fiscal Responsibility and Reform to develop a plan to meet those challenges. Current policy projections show unsustainable growth in government deficits led by significant growth in federal non-interest spending. Our nation's economic security and American living standards depend on slowing this growth in federal spending. Experiences of other OECD countries that have undertaken significant fiscal adjustments in the past show that the countries that have reduced spending have had success in reducing deficits on a sustainable basis and without experiencing the adverse impact on economic growth brought about by tax increases. We have identified critical reform components of the corporate income tax system that should be part of a fiscally responsible comprehensive tax reform and budget package. The scope of these changes is significant but perhaps no more significant than the tax changes enacted as part of the Tax Reform Act of 1986, which reduced the corporate tax rate from 46 percent to 34 percent and, at the time, placed the U.S. corporate tax rate below that of most other major economies. Since 1986, however, changes in the world economy, changes in the ability of foreign competitors to operate on a global scale and changes in the tax systems of our major trading partners now place the United States at a decided tax disadvantage, which runs a high risk of severely undermining competiveness of American companies and workers:

• Today the United States has the second highest tax rate among developed countries.
• The U.S. international tax system was formulated in an era in which U.S. companies faced little competition from foreign-headquartered multinational corporations as they competed around the world. The current U.S. system is inconsistent with the free flow of trade and investment, and it inhibits use of foreign earnings to invest in the U.S. economy.
• The U.S. research tax credit, once the most generous in the world, now lags behind America's major competitors.

In sum, we need significant tax reform to address these deficiencies in order to allow American workers and companies to compete effectively in domestic and international markets, to create jobs, and to achieve a higher standard of living for all Americans. An attractive economic environment in the U.S. will boost critical business investment and U.S. production, creating a competitive business environment that can propel job creation and lead to a doubling of U.S. exports of goods and services to the world's consumers.

As we look to the rest of the world, we see countries designing tax systems to attract businesses and capital investment and to improve the competiveness of their companies and workers. In announcing corporate rate reductions and further tax reforms in the United Kingdom in June to improve the competitiveness of the UK tax system, the Chancellor of the Exchequer, George Osborne, stated: "We need to see growth not just in one corner of our country, nor in just one sector. For we live in a world where the competition for business is growing ever more intense. I want a sign to go up over the British economy that says 'Open for Business'." U.S. companies and U.S. workers also need a competitive tax system that shows the United States is open for business as well.

In the following portion we address these three areas in more detail.

1. Corporate tax rate reduction - Significant corporate rate reduction is needed to attract investment to the United States. Increased capital investment brings more employment and higher wages for U.S. workers. Increased U.S. production expands exports around the world.

In 2010, the average corporate tax rate in the OECD (excluding the U.S.) is 25.5 percent, including sub-central taxes. The corporate rate in the United States, including state income taxes, is 39.2 percent (calculated by the OECD as a 35 percent federal rate and a deductible state rate of 6.47 percent). Holding the state tax rate constant, the United States would need a federal corporate rate of approximately 20 percent to match the 2010 OECD level. Future tax reductions already announced in several OECD countries mean that our trading partners will continue to gain a competitive advantage in this area unless the United States undertakes a significant corporate rate reduction.

2. Territorial-type tax system - The rest of the world increasingly uses territorial systems under which foreign earnings - taxed once in the foreign country – can be brought back for reinvestment in the domestic economy without incurring additional home country tax. Within the OECD, 25 countries use these territorial systems, with the United Kingdom and Japan adopting territorial systems in 2009. The United States, along with only five other OECD countries (Chile, Ireland, Korea, Mexico and Poland) use so-called worldwide tax systems in which foreign earnings are subject to domestic tax when remitted to the domestic economy. These five other countries, with the exception of Ireland, have little outward foreign investment and have much lower corporate tax rates than the United States – an average rate of 20.5 percent compared to the U.S. rate of 39.2 percent – so that these countries impose little or no additional home country tax on foreign earnings after application of the foreign tax credit.

In addition to the U.S. system creating a barrier that "locks out" foreign earnings from use in the domestic economy, the system creates an unlevel playing field that favors foreign-headquartered multinationals in entry into foreign markets over U.S. companies. Expansion abroad by U.S. companies is vital for establishing export platforms for U.S.-produced goods and expanding the scope of domestic investments in research and other high-paying headquarters' operations. Economic analyses show that foreign operations of U.S. companies are complementary to their domestic operations – operations abroad expand domestic operations.

Current Administration budget proposals and revenue-raisers in the "tax extenders" legislation addressing international taxation would move the United States in exactly the opposite direction of our trading partners – making it more difficult for U.S. companies to compete abroad and increasing the "lock out" effect on foreign earnings, thereby reducing funds available for reinvestment at home. At the same time, failure to quickly extend the business tax provisions which expired at the end of 2009, including important international provisions and the R&D credit, creates business uncertainty and impacts current and future investments.

One further note on the territorial tax systems used broadly by our trading partners. These systems do not incorporate features that have been proposed by some U.S. policymakers that would actually increase the tax burden on the foreign operations of U.S. companies – by either subjecting to current U.S. tax certain active foreign business income or by denying deductions for overhead activities that indirectly relate to the foreign operations. A competitive territorial tax system for the United States should broadly follow the practice of our trading partners and not invent new limitations in the design of these systems.

3. Enhanced and permanent R&D incentive - An expanded and permanent R&D tax incentive is necessary to maintain the United States as an attractive location for innovation and research. A 2009 OECD study places the United States 19th out of 31 OECD countries in terms of the favorableness of our R&D tax incentives and 24th out of an expanded group of 38 countries, falling behind advanced emerging economies such as Brazil, China, India and Singapore.

In addition to these "up front" tax incentives, a number of countries have instituted favorable tax rates on royalty income (often referred to as "patent box" regimes) generated from R&D and other innovative activities. These countries include Belgium, China, France, the Netherlands, Spain and Switzerland. The UK government has announced its intention to introduce a patent box regime effective in 2013. These preferential tax rates provide further incentives to foster innovation and the development and retention of intellectual property.

Technological advances achieved through U.S. R&D are responsible for significant increases in economic growth and worker productivity. As mentioned above, the R&D credit expired at the end of 2009 and should be seamlessly extended as quickly as possible. The absence of the tax credit in 2010 makes the United States far less competitive than even our 24th place ranking in the OECD study. America needs a strengthened, permanent R&D credit to encourage greater private-sector innovation investment and ensure the jobs of the future are created here in the United States. In addition, we should consider other tax policies that would encourage the creation and retention of intellectual property in the United States.

We would appreciate discussing these important reforms of the corporate tax system that can significantly accelerate job creation in the United States, increase investment and improve U.S. competitiveness. At the same time, the United States must embark on a credible strategy to bring down the rate of growth of federal spending. There is broad support from Business Roundtable member companies to work with the Administration and Congress to demonstrate that these reforms will have significant and positive impacts across the economy. We welcome the opportunity to work with you in our shared desire to increase job creation and economic growth.

Sincerely,

Ivan G. Seidenberg