It’s past time for tax reform
Lowering corporate taxes would make U.S. and Pennsylvania businesses more competitive
It’s been a long time since the federal tax code was reformed. The year was 1986 — and just to put it in perspective, Chuck Noll was the Steelers head coach, John Stallworth was one year from retirement, and Bubby Brister was a rookie quarterback.
But, unfortunately, unlike the Steelers, the tax code has not had many productive seasons during the past 31 years, and it now requires a serious rebuilding effort. While other countries have modernized their tax codes, the United States has not, although it has continued to increase our tax rates. Today, American businesses suffer from a corporate rate of 39 percent while their foreign counterparts face an average rate of 25 percent.
Why should we care? Because the tax code has a direct impact on economic growth and job creation.
Our corporate tax system encourages the overseas production of goods, which are then imported into the United States. That matters everywhere in the country but especially in Pennsylvania, where more than 16,000 manufacturers employ almost 800,000 workers. Those jobs could be threatened if the tax code is not reformed.
That possibility is even more disturbing because Pennsylvania already is behind the eight ball in job creation. While job growth nationwide has grown at a respectable rate of 7.5 percent since 2012, job growth in the Keystone State has been nearly flat at 0.8 percent. The manufacturing industry in Pennsylvania alone shed about 5,600 jobs between July 2015 and July 2016.
The current tax code also encourages U.S. companies to relocate in order to save on their tax bills. In the past few years, the Cecil-based drug giant Mylan bought a Dutch company and moved its official headquarters to the Netherlands, and medical technology company Medtronic merged with an Irish company and moved its headquarters to Ireland (which has a corporate tax rate of 12.5 percent). Other household names, such as Johnson Controls and Pfizer, have considered similar transactions (called “inversions”) to avoid the high taxes levied by the United States. With a number of flagship U.S. companies, such as Kraft Heinz and Alcoa, having a major presence in Western Pennsylvania, the specter of a tax-based business relocation is always present.
The good news is that there is a growing consensus that it is time to fix this broken system. After pledging to develop “historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone,” President Donald Trump and his team have outlined a set of tax-reform principles. In the House of Representatives, Speaker Paul Ryan and House Ways & Means Committee Chairman Kevin Brady have released a detailed blueprint, called “A Better Way,” and conducted a number of hearings. In the Senate, Finance Committee Chairman Orrin Hatch is seeking input and actively looking at various options.
All of these policymakers appear to be driving in the same direction. The House plan, for instance, would slash the corporate rate to 20 percent, bringing the U.S. tax rate closer to that of competitor nations. Taxes for small businesses would be reduced to 25 percent.
These proposals would also move us to a more competitive international system. Our current corporate-tax arrangement, known as a worldwide system, assesses U.S. taxes on all income, regardless of whether it is earned in the United States or in foreign countries that have a lower rate. The United States is the only country in the Group of Seven (the world’s most advanced economies) that still has a worldwide system.
In its place, officials are looking to institute a territorial system, whereby businesses would be taxed in each country only on the income they earn in that country. This change would help level the playing field for companies in Pennsylvania that have significant foreign operations but might want to invest more in the United States under the right circumstances. It would also encourage U.S. companies to bring back some of the trillions of dollars now parked overseas, where they have been accumulating money to avoid higher U.S. taxes.
The tax proceeds from these repatriated earnings, along with revenue generated from broadening the tax base and other structural changes, could help ensure that tax reform is revenue neutral (meaning that it would not increase the long-term deficit).
These reforms aren’t just abstract policy proposals; they would have a real impact on the bottom line. The Tax Foundation (an independent, nonprofit taxpolicy organization) recently estimated that the House blueprint would create almost 70,000 jobs and produce annual after-tax income of more than $5,000 for median households in Pennsylvania.
We’ve been waiting long enough. Sure, there is a lot happening in Washington, D.C. But as the August recess looms, lawmakers need to focus on what is going to give them a winning season. Tax reform would make a real difference. Now is the time for the president and Congress to get down to business and work together to reform the tax code, thereby helping American businesses and families and giving Pennsylvania a much-needed boost.