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Taking Action for America: Competitive Taxation

The U.S. corporate tax system has failed to keep pace with the changing global economy. The U.S. system is an outlier at a time when capital is more mobile and the world’s economies are more interconnected than ever before. Modern, streamlined and fiscally responsible tax policies contribute to a competitive business environment that attracts new investment and supports strong economic growth and job creation. 
 
Many countries have reformed their tax policies in response to the increasingly important role that national corporate tax rates play in many investment and plant location decisions. Unfortunately, the United States has not followed suit. The last significant overhaul of the U.S. corporate tax system was in 1986 — before the widespread use of the Internet, before the Soviet Union collapsed and before China became a modernizing economy — and much existing policy dates back to the 1960s and earlier. Most of the policies introduced in the interim have been patchwork solutions that are often temporary in nature. As a result, U.S. corporate tax policy has become increasingly outdated and overly complex, making the United States a less attractive site for new investment and placing U.S. companies at a disadvantage in the global marketplace. 
 
Reforms of the U.S. corporate tax system must focus on two critical components: the corporate tax rate and the system of international taxation.
 
First, the U.S. combined statutory corporate tax rate currently stands at more than 39 percent, now the highest in the OECD after Japan reduced its corporate rate this year. In contrast, the average combined statutory corporate tax rate in other OECD countries was 25.1 percent in 2011. This difference actually understates the United States’ disadvantage. Prospective investors will compare the United States not to the average but to the best country when it comes to tax rate comparisons. Although not as widely noted as the high statutory corporate tax rate, the United States also has a high effective tax rate on corporate income. A study of financial statement effective tax rates for the 2,000 largest companies in the world found that U.S.-headquartered companies faced a higher worldwide effective tax rate than their counterparts headquartered in 53 of 58 foreign countries over the 2006–09 period.
 
Second, the United States continues to use a worldwide tax system that taxes U.S. companies on both the income that they earn at home and the foreign earnings of their subsidiaries, when those earnings are remitted back to the United States. In contrast, the vast majority of OECD countries use a territorial tax system in which little or no additional tax is typically imposed by the home country on active trade or business profits earned abroad because that income is already taxed in the country where it was earned. The additional tax imposed by the United States on foreign earnings creates a barrier for U.S. companies desiring to access their foreign earnings that is not faced by their competitors headquartered in most other OECD countries. Foreign markets represent 95 percent of the world’s consumers, and access to these  markets helps expand the demand for U.S. goods and services. Accordingly, U.S.-headquartered companies and the jobs of their employees depend on their ability to compete and win in the global arena. 
 
A competitive U.S. corporate tax rate and territorial system can enhance U.S. economic performance, including more jobs, more investment and increased economic growth with increased living standards for American families. A lower corporate tax rate will enhance the incentives for companies to locate here, attract high-value investments, reduce investment distortions across sectors and lessen the current incentives to rely on debt rather than equity in financing capital investments. Likewise, the adoption of a territorial tax system will increase the incentive for companies to incorporate in the United States, allow U.S.-headquartered companies to compete more effectively in foreign markets, and encourage existing U.S. companies to bring home their earnings from overseas and reinvest them in the United States. 

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