Yesterday the Senate Homeland Security Committee’s Permanent Subcommittee on Investigations held a hearing on “offshore profits shifting,” with a focus on making Apple and its CEO Tim Cook into the poster child of corporate tax avoidance. As I wrote in The Hill, blame is not a national competitiveness strategy.
But another theme of the event was the seeming unfairness of a situation where domestic multinationals like Apple are not required to pay the full 35 percent tax on their foreign earnings. Despite the fact that we are one of the only nations with a worldwide system of taxation (that requires U.S. multinationals to pay US taxes on foreign earnings when they bring them home), this notion is actually wrong. It is actually in the interest of non-multinational U.S. firms for multinationals to pay less in taxes. Here’s why.
U.S. economic politics is often framed as a clash between “Main Street” and big multinational corporations, with the former salt-of-the earth hard working mom and pop owners and the latter controlled by profit-hungry greedy tycoons. But this framing misses the point that what will determine whether America thrives in the global … Read the rest
“With pencils being sharpened on a debt deal,” Politico reports (subscription article), “all eyes are on the gas tax as a possible savior for transportation spending. But another option that may cause lawmakers less heartburn is being obscured by the gas tax dust: linking energy production with infrastructure spending…includ[ing] instituting a fee on oil production, or expanding oil and natural gas drilling availability.” Without a doubt, leveraging expanded energy production for revenue is a welcome idea. But linking this revenue to transportation infrastructure spending is misguided because it breaks a very useful policy connection: consumption and infrastructure use.
The thinking goes that new fees on oil and natural gas extraction are more politically feasible than a gas tax, as the cost to consumers would be relatively hidden. While industry would ultimately try to pass costs on to consumers, as the Politico article put it, “the pain of a new fee “upstream” has the advantage of not being immediately obvious to an electorate jittery about the economy — certainly nothing as in your face as a tax increase at the pump.” The problem is that tying energy production to transportation infrastructure-spending … Read the rest
As we approach the end of 2012, the currently expired U.S. R&D tax credits are being altogether ignored by the media, and generally ignored by policy makers. Nothing has been done this year to ensure that firms will receive the same benefits as in the past. This leaves firms guessing as to whether or not they should increase or decrease their investments in R&D, or move them abroad. The evidence on the effectiveness of R&D tax incentives continue to mount. In the latest edition of New Economics Papers in Technology and Industrial Dynamics, another compelling analysis by Bond & Guceri, “Trends in UK BERD after the Introduction of R&D Tax Credits,” shows that R&D tax incentives not only bolster business investment in R&D, but businesses respond even more than previously predicted by Bloom et al. The analysis shows that especially in high-tech manufacturing, the R&D tax credit causes a substantial increase in R&D, which provides further evidence that a permanent R&D tax credit is needed here in the United States.
The study shows that when R&D costs are treated more favorably by the tax code than capital investment, firms … Read the rest
Last week, representatives of an array of think tanks and advocacy organizations from across the political spectrum gathered at the American Enterprise Institute (AEI) to discuss the feasibility of enacting a national carbon tax. It was the fifth such closed door-meeting. It might surprise people to learn that there is common ground between some conservatives and liberals on the idea of a carbon tax. However, even if a narrow patch of common ground yields a solid policy consensus, innovation must be part of the carbon tax debate.
To be sure, some activists on the Right have been highly critical of the group’s efforts, the participation of free market-oriented groups like AEI and the R Street Institute notwithstanding. In a post to a conservative listserv – in which he also leaks a copy of the meeting agenda – the Competitive Enterprise Institute’s Myron Ebell declares, “We must kill this incredibly harmful idea as quickly as possible.” “A carbon tax is not a conservative, free-market policy,” Nicolas Loris writes at the Heritage Foundation’s blog. And yet a carbon tax has a surprising number of conservative supporters and could boost national energy … Read the rest
Useful comment by Suzy Khimm about the source of innovation and Perry Rotella about how innovation happens in companies. Solitary genius is only part of the innovation ecosystem. That has always been true. It’s especially true now.
As anyone who has been to the lab at Menlo Park can attest, Thomas Edison’s intensity was imparted on a team, who often slept on cots in the lab along with their boss, when working toward what seemed like a breakthrough. In today’s world, how we do things is as much innovation as the products themselves. The U.S. tax code needs to better reflect that.
When Congress takes up corporate tax reform, lawmakers should consider a few ideas from ITIF. First, make clear that process R&D qualifies for the R&D tax credit. Currently, the way Treasury interprets the law can make it difficult for companies to take the credit for process innovation. In addition, it is easy for process innovation to spill into the market. If we make it easier and more economically worthwhile to try new ways of producing, the more firms will invest in ways to improve productivity, and the more competitive they will be. It might also make the U.S. a more attractive place to expand manufacturing operations.
Second, Congress should use the tax code to promote more collaboration between companies as well as non-corporate entities. … Read the rest
As of April 1, when a change in Japan’s tax law goes into effect, the United States will have the highest statutory corporate tax rate of any industrialized nation. It is bitterly appropriate that this happens to be the day we mock foolishness. There is a race underway for global competitive innovation advantage. More and more nations are beginning to understand their tax codes are among the most valuable tools they have to win that race. They understand that higher corporate taxes reduce investments, new business start-ups, and inward foreign direct investment. In the last 30 years, corporate tax rates for OECD nations and China have declined from nearly 50 percent to levels less than half that. Even formerly high-tax countries such as Sweden have reduced their corporate taxes dramatically. Unfortunately, the United States is not following suit. The good news is that the Obama Administration and many in Congress seem increasingly aware of this new global reality and have begun to look into meaningful corporate tax reform. The bad news is that almost all proposals for corporate tax reform are premised on revenue neutrality. The problem with revenue neutrality is that it is likely to neutralize potential benefits of reform. Simply lowering the statutory corporate rate, but then cutting deductions and credits to pay for it, will do nothing to address the fact that the U.S. also has a very high effective corporate tax rate relative to our competitors. Moreover, cutting key incentives like the domestic production credit, the R&D credit, and accelerated depreciation would reduce the incentive for companies to make the investments needed to restore U.S. competitiveness.
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The President mentioned many issues ITIF focuses on in his State of the Union address last night. And by in large, we agree with what he said when it comes to economic competitiveness. The President deserves praise for putting these issues, specifically manufacturing, front and center. He helped rally the nation and the Congress to the fact that restoration of competitiveness and a vibrant manufacturing sector are, indeed, the pillars on which rests our economic future. However, in some cases, we wish he had gone just a little further, maybe clarifying, maybe being a little bolder. Here are a few examples: Funding R&D: “Innovation is what America has always been about,” he said. Absolutely. We laud him for prodding Congress to maintain basic research funding budgets. However, the President should have included applied research in his prod. To understand why, look at Germany. Its manufacturing sector accounts for 20% of the country’s GDP as opposed to the United States 11% and German manufacturing workers earn 40% more in hourly wage compensation than U.S. manufacturing workers. Its exports of research-intensive high-tech products are seven times greater than the United States’ as a share of GDP. One reason is that the country spends six times as much on industrial research and production technologies as does the United States.
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On this day in 1957, the Soviet Union deployed Sputnik. The two-foot, 180-pound orb’s beeping was the starting gun of the space race and we in the U.S. seemed to be just putting our sneakers on. Despite President Eisenhower’s initial shrug, America freaked out – but in good way.
In under a year, a Democratic Congress and the Republican President created and made operational the National Aeronautics and Space Administration (NASA). The National Defense Education Act, which not only jump started higher education in math and science here but also promoted the study of countries we realized were gaining on us, became law. The Advanced Research Projects Agency (ARPA) came into being. Later, of course, it became (Defense) DARPA, which yielded numerous technological advances, including what became the Internet.
When it came to being #1 in space, we didn’t wait for market forces to work their magic. In a speech at Rice University on September 12, 1962 President Kennedy said the tripling of the space budget in a little over two years was worth it. There were new jobs, new companies and new discoveries. We were in the race but … Read the rest
In yesterday’s posting, I cited Rob Atkinson’s new report on tax reform. In that report, he argues that there is no evidence of the claim that tax incentives automatically lead to unproductive over investments in the favored sectors. For example, some investment tax credits may actually boost productivity because of an underlying under investment in certain productivity raising activities. I am prepared to admit that some tax incentives lead to economic distortions. For example, I’m not sure the mortgage tax deduction for second homes leading to greater vacation home production is the most productive use of capital. But I do agree that there is knee-jerk assumption about differential treatment in the tax code.
Atkinson points to a recent report by the President’s Economic Recovery Advisory Board (PERAB), Report on Tax Reform Options. That report asserts “Because certain assets and investments are tax favored, tax considerations drive overinvestment in those assets at the expense of more economically productive investments.”
I ran into an example of this thinking specifically with respect to intangibles in the previous Administration’s Treasury Department’s 2007 report on … Read the rest
Here is an interesting idea from my friend Rob Atkinson at ITIF: a one-size-fits-all tax code is not one-size-fit-all. In a new report, (U.S. Corporate Tax Reform: Groupthink or Rational Debate?), he points out that the push for tax simplification will actually harm economic competitiveness.
The current thinking in Washington is that the tax code impedes economic competitiveness because of high tax rates. In order to lower rates, the tax code should be “simplified”, i.e. eliminate many tax deductions and credits. Increased revenues from tax simplification would offset revenues lost from lowering the corporate rate.
The other part of tax simplification is a call for fairness. Many see these tax deductions and credits (aka loopholes) as breaks for special interests. Others argue that they are expenditures in discipline, not subject to budgetary discipline.
Both of these arguments contain more than a grain of truth. I have long argued that, contrary to popular perception, the United States has long had a (dis?)functioning industrial policy: the tax code. It is a de-facto policy hidden from public (and most policymaker’s) sight.
The problem with the tax code is not that it … Read the rest