What Kind of Tax Reform Do We Need?
This is an introduction to a package of five articles offering opinions on what kind of tax reform would be best. Scroll down below the introduction to see the articles. There’s one thing about corporate tax reform that everyone agrees on: that we should have it. But what should it look like? On that point, opinions are scattered. It was not difficult for CFO to find strong opinions on this topic. We’ve gathered the perspectives of a CFO, a principal of a Big Four firm, a university pr ..
Philip G. Cohen
This is one of five articles offering opinions on what kind of tax reform would be best. See the others, below left.
The last time there was a major overhaul of U.S. tax law was in 1986, and since then, our corporate tax system has become outdated and noncompetitive. Given the global nature of the current world marketplace, we need a more competitive tax system that encourages investment and job creation here at home while enhancing the international competitiveness of American corporations.
Corporations make difficult business decisions due to disincentives contained within the U.S. tax law. The tax system should encourage U.S. investment and the return of foreign capital. As it stands today, our high corporate tax rate discourages investments in the United States. It subjects domestic companies to a worldwide system of taxation that discourages foreign capital from returning and amounts to a double layer of taxation.
If we get this right, it could lead to billions of dollars being invested in the U.S. economy, driving growth, innovation, and job creation. There are four major efforts that need serious consideration:
- Significantly lower the U.S. corporate tax rate. This would strengthen incentives to encourage U.S. investment, free up resources for additional business investment and expansion, and allow for a tax system that does not encourage inversions and U.S. base erosion. A reduction in the corporate tax rate is necessary for creating a competitive environment for investment and encouraging job creation with resulting economic growth in the United States.
- Shift from the current system under which U.S. corporations are taxed on repatriated income earned in foreign countries, to a territorial system, in which taxation would be based only on income from domestic business, transactions, and sources. This would neutralize the current bias toward foreign investment over investment in the United States, which is one of only a few countries where corporations are subject to taxation on repatriated income earned worldwide. It would also reduce or eliminate the incentive to retain rather than distribute offshore earnings.
- Remove current provisions in the tax code that encourage tax-driven decisions due to lack of tax neutrality and double taxation. These include incentives to invest in pass-through entities rather than corporations, retain rather than distribute corporate earnings, and finance through debt rather than equity.
- Strengthen incentives for domestic R&D and innovation. The existing research tax credit should be strengthened and made permanent. Increasing the credit to at least 20% (from 14%), simplifying the calculation, and clarifying the rules would make the U.S. credit more competitive with R&D incentives in other countries. We also need to adopt a meaningful innovation box regime, providing for lower tax on certain types of income derived from intellectual property. Current proposals are a good start but require additional work to get it right and be meaningful. These measures would encourage greater investment in U.S. R&D and attract technical jobs back to the United States.
With these reforms, we would take important steps toward enhanced economic growth that builds a foundation for revenue growth. At the end of the day, we want to be globally competitive through a fair and equal playing field from a tax perspective.
Frank Calderoni is executive vice president of operations and CFO at open-source software developer Red Hat.