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Reducing corporate tax rates could restore a prosperous America

Posted: July 20, 2012 - 1:08am

WASHINGTON — Even as the country struggles with slow growth and high unemployment, America remains resilient, capable of tackling great challenges including the looming year-end “fiscal cliff” and the vast national debt.

Success will require Congress and the administration to unleash the dynamism of the private sector, adopting policies that will result in the economic growth necessary to reduce our deficits and put our citizens back to work.

Tax reform must be a priority.

A serious short-term tax problem does loom. Unless Congress extends expired and expiring federal tax provisions, taxes could rise by $400 billion in 2013, threatening to drive the U.S. economy back into recession. Business Roundtable, an association of corporate CEOs, has urged Congress to extend the expiring and already expired individual and business tax provisions through the rest of next year. Such an extension would help ease the uncertainty that now discourages companies from investing and hiring.

An extension through 2013 would also provide Congress a prime opportunity to enact comprehensive tax reform, address the financial footing of entitlement programs, and adopt a long-term credible deficit reduction plan. These actions will spur growth and restore confidence in the U.S. economy at home and abroad.

The revenues produced by sustained economic growth are essential to deficit reduction. Imagine trying to solve America’s fiscal troubles in a time of falling revenues; deep spending cuts and Greece-like austerity programs would surely be required.

Indeed, the Office of Management and Budget estimates that a sustained increase in the growth rate of the economy of 1 percentage point will reduce the deficit by more than $3 trillion over the next 10 years.

Significantly, faster economic growth will also boost the income of American workers.

Unfortunately, the U.S. tax code today has created a climate that works against growth. The United States now labors under the highest statutory corporate tax rate in the developed world. Further, the country suffers from an international tax system that has failed to keep pace with the realities of global competition.

The high statutory tax rate discourages investment in the United States by both American and foreign corporations. Less investment means less production, reduced research and development, fewer job opportunities and lower wages.

A reduction in the corporate tax rate to the average rate of other industrialized countries — about 25 percent — would eliminate a great disadvantage faced by businesses. The basic strategy is to achieve these lower rates by eliminating exemptions and other tax breaks, essentially broadening, flattening and simplifying the tax structure. It’s a daunting assignment, but with hard work and a focused effort, comprehensive reform can be accomplished within a year.

At the same time, the United States must modernize its international tax system to enable American companies to compete more effectively in foreign markets. Amazingly, our international tax rules date back to the era of the Model T.

American companies will logically expand overseas: Foreign markets represent 95 percent of the world’s consumers — billions of people with rising incomes in countries like China, India and Brazil. Expansion by American companies to serve these markets adds jobs at home. Yet today we are the only major industrialized economy that imposes a significant tax penalty for reinvesting these foreign earnings at home.

Modernization will remove this competitive disadvantage, thus encouraging American companies to bring their overseas earnings home for domestic reinvestment. The result? More jobs here.

No single, simple solution exists to strengthen economic growth and resolve America’s complex deficit and debt troubles. But comprehensive tax reform is a significant step we can take today that will improve American competitiveness, increase economic growth and put the nation on the path toward fiscal stability.

Why wait?

• Engler is president of the Business Roundtable, an association of chief executive officers of U.S. corporations.

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