If a suit doesn’t fit, you can typically add or cut out a bit here and there, move some buttons, adjust a hem or add a dart and get by for a while. If a landscape starts to get overgrown, you can trim back the shrubs, divert attention with some seasonal plants and shape a tree.
But at some point, these alterations just don’t work any more. You can’t repeatedly change the changes and expect the outcome to be just right.
The same can be said for our nation’s tax code. For years legislators have made changes here and there. They raise some taxes, cut others, apply a tax credit for this group and deny a deduction for that segment. Individually, these changes usually have good intentions, but the result has become is an unwieldy and unfair tax code that stretches to nearly 4 million words. The cost of tax compliance now costs the economy an estimated $224 billion.
All of these puts and takes have resulted in a corporate tax rate that is the highest in world, coming in at nearly 40 percent when you combine federal and state taxes. Meanwhile, tax rates in most of the world are falling. Some industries pay average taxes that are much higher than other industries. For example, the average effective tax rate for the energy industry is around 37 percent, while industrial firms pay an average of 24 percent.
It’s time for real tax reform. Congress can start by changing to a territorial system from its current worldwide system. The United States stands virtually alone in using a worldwide system, under which our government taxes all of the income, regardless of where in the world it was earned, of businesses headquartered in the United States. The rest of the world follows a territorial system, where a business is taxed only on the income earned within the country’s borders.
This change would immediately make American businesses more competitive in the world market. It would remove the incentive for businesses to leave the United States and take their headquarters to other countries, which would boost our economy and help keep jobs here at home. These so-called “inversions” are robbing us of some of our best-known companies, who are finding that the only way they can effectively compete is to move elsewhere.
The time has long passed in which American companies could ignore foreign competitors. Information moves around the world in the blink of an eye. Even products can be put on a jet and cross an ocean in a few hours. Consumers on the Internet can buy products from almost any company, and country, in the world.
Our leadership is threatened by our out-of-date and cumbersome tax policies. By passing comprehensive and pro-growth tax reform, Congress and the Administration can quickly level the international playing field.