Reforming Our International Tax System Is at the Heart of American Economic Competitiveness

Ed Kleinbard, a law professor at the University of Southern California, recently released a paper ('Competitiveness' Has Nothing to Do with it) that essentially argues that American multinational companies are not hampered from a competitiveness standpoint by the current U.S. tax code.

In fact, Kleinbard contends that these U.S. companies have an advantage over their foreign competitors because of their sophisticated ability to navigate around the high corporate tax rates that define the code and the outdated manner in which the U.S. taxes foreign income.

In his findings, Kleinbard also acknowledges that the current tax code is "highly distortive and inefficient," but overall he significantly underestimates how the U.S. tax code impacts American-headquartered companies who conduct business around the world and who find our current tax laws an enormous challenge in their ability to plan for future growth here at home and in new markets abroad.

The fact that U.S. multinationals have not given up and are actively dealing with this tax challenge does not mean that the status quo fossilized in our outdated tax code shouldn't be addressed and in an urgent manner no less. It simply means, U.S. multinationals have recognized and are dealing with the realities of an evolving 21st Century global marketplace, even if Washington and our policymakers have not.

The "sophistication" that Kleinbard notes of U.S. businesses in their tax planning is more reflective of how anxious these companies are to remain competitive from a global tax perspective, than it is of this notion that the current code is a resource that should be taken advantage of.

The current U.S. tax code is fundamentally broken and absolutely harms the ability of American companies to grow domestically and internationally. That might not be the viewpoint at the law school lectern, but if you manage a business that competes in the dynamic global economy you may have a different perspective.

This is especially true when it comes to the U.S. international tax system. Why else would U.S. companies be pursuing potential opportunities to re-incorporate overseas if they are supposedly able to achieve better tax results under U.S. tax law?

Under current policy, U.S. companies are taxed on overseas earnings in the country where they were made and yet again here in the U.S. No other G8 country, nor virtually any other industrialized nation, uses such a punitive system. It results in (1) a disincentive for companies to invest in the U.S.; (2) a rise in production costs, making us less competitive abroad; and (3) the blocking out of nearly $2 trillion that companies cannot repatriate to the U.S. without paying this burdensome toll charge.

On the other hand, with a fresh, modernized policy, the U.S. government could incentivize, not punish, companies for bringing earnings home. The solution -- also recommended by Ways and Means Committee Chairman Dave Camp (R-MI) and numerous studies commissioned by President Obama -- is to transition the United States to a so-called "territorial tax system".

This simplified system is actually how foreign companies that invest here in the U.S. are generally taxed. They pay taxes on their profits earned in the U.S., but they are not taxed by the U.S. -- or their home country -- on the profits they generate around the globe because those profits are taxed in the countries where they operate. Such a straightforward and commonsense system should also be applied to globally-engaged American-headquartered companies.

And while Professor Kleinbard questions the need for international tax reform, our trading partners around the world are busy adopting territorial systems in order to make their business climates more attractive to investment. This shouldn't be surprising, as "competitiveness" does not occur in a vacuum, especially in an interconnected economy. The U.S. should certainly follow suit, and here's why:

• We've seen tax reform work already. As Europe's economic power and the world's third-leading exporter, Germany modernized its system in this fashion in 2001. Our largest trading partner, Canada, has also made similar reforms that have led to positive results -- to such an extent that in the process, it has grown tax revenues faster than GDP. In Japan, unemployment has decreased and wages have increased since similarly updating its tax system in 2009.

• Tax revenues will increase in the long run. According to the nonpartisan Tax Foundation and others, compliance under our outdated system costs corporations and the government more than $40 billion annually. With reform, companies will not only see that money put to more efficient use, they'll see increased revenue. In fact, in eight of the years between 2000 and 2009, the modernized systems our competitors are using raised more tax revenue than our current system.

• We can incentivize, not punish, companies for bringing earnings home. The $2 trillion in capital that is currently locked out of the U.S. can be allocated toward renewed investment, job creation and R&D at home. In fact, according to the American Action Forum, a policy institute in Washington, this trapped capital could be utilized to create up to 3.5 million U.S. jobs.

It's easy -- and fashionable -- to suggest that corporations aren't paying their fair share of taxes. But it's a simplistic argument that ignores the facts and disregards the unforgiving realities of what it takes to be successful (or simply survive) in our modern economy. To suggest that the tax code isn't hampering U.S. competitiveness is naïve at best; at worst, it could drive short-sighted public policies that further tie the hands of American companies and directly threaten the economic security for countless American workers.

Let's Invest for Tomorrow (LIFT) America is a coalition of U.S.-headquartered companies, trade associations and economic stakeholders representing industries that are critical to the American economy. To strengthen American competitiveness in the global marketplace, the coalition supports a modern, hybrid international tax system - similar to the one used by our trading partners - that would promote increased U.S. investment, while protecting America's tax base.