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Sen. Max Baucus, D-Mont., just announced plans to retire next year. The 71-year-old Montana Democrat has spent the twilight of his career working to fix America’s broken tax code, and all signs indicate that he wants to make tax reform his legacy.
In terms of both politics and policy, he’d do well to focus on America’s corporate tax system. Its flaws are seriously impeding business growth and choking off job creation.
That last major overhaul of corporate taxes occurred in the mid-1980s and the time is now for the corporate code — a rickety, antiquated mess — to catch up with the changing global economy. Currently, the inflated and overly complex corporate tax code is shunning capital away from our shores, an effect that can only grow more pronounced as other countries become more competitive by lowering their tax rates.
There are three simple provisions any comprehensive bill must include. Each will stimulate business growth at home and help American businesses compete abroad.
The first is to lower the corporate tax rate. Every major political figure — from President Barack Obama to Speaker John A. Boehner — has expressed support for such a move. At 39.1 percent, the American corporate tax rate is the highest in the Western world. It’s a full 14 points above the average rate among Organisation for Economic Co-operation and Development countries.
The American corporate rate hasn’t been reduced since 1988 — in fact, it has increased twice. Meanwhile, 32 other OECD nations have cut corporate taxes by an average of 19 points since then. The consequences of this disjunction have been devastating. Companies are doing business elsewhere, denying Americans new jobs and growth.
Lowering the corporate rate to fall in line with general OECD trends would stimulate business growth here. Research from Cornell and the University of London shows that just a 1-point cut in U.S. corporate taxes could generate a 0.4 to 0.6 percent increase in gross domestic product within a year. That would contribute to rising income for America’s workers. That would also mean more capital for companies to expand and hire more people.
The second essential component of real corporate tax reform is simplification. The U.S. tax code now runs an astonishing 70,000 pages. It’s been modified more than 4,500 times in the past decade, with lawmakers routinely adding new wrinkles to benefit special interests. The result is a massively complex code that’s expensive for businesses to navigate.
Money spent on accountants and tax lawyers is money that’s not financing new plants and projects. Streamlining the corporate code would radically reduce the financial burden of compliance and free up capital for productive investment. And it would eliminate the countless tax carve-outs now granted to the politically connected.
Finally, comprehensive corporate tax reform must bring an end to the antiquated and deeply destructive practice of double taxing profits earned by American companies in foreign markets.
The United States is alone among G-8 countries in seeking to tax the foreign earnings of its companies. Such businesses end up getting taxed twice — once at the foreign rate, then again when earnings come back to the states.