One of the more encouraging moments in President Obama’s State of the Union address was his call for corporate tax reform. The last time the U.S. updated its tax code was in 1986.
The tax structure in the United States is quite complex and puts companies in the U.S. at a significant global disadvantage. The tax code’s complexity has resulted in huge compliance costs for big and small businesses alike rather than bottom lines and job creation.
What’s worse is that companies are moving their headquarters offshore to circumvent America’s anti-competitive 35% corporate tax rate. According to research by Thomson Reuters, at least 484 U.S. firms, with a value of more than $43.6 billion, were acquired by foreign interests in the first half of 2013. What’s more, legislative fixes by Congress to stem the outflow of corporate headquarters to more competitive tax zones (including Ireland, Bermuda and the Cayman Islands) have not worked. Bloomberg BNA recently reported that the law Congress passed a decade ago intended to penalize CEOs whose companies shifted their legal addresses to tax havens was completely ineffective.
Business leaders are rational economic actors who will take their companies offshore if it makes economic sense to do so. For this reason, corporate tax reform in the United States must be addressed head-on in a new legislative effort. Varying proposals and ideas are being discussed in Congress and elsewhere. One proposal that seems to be gaining traction is a “revenue neutral” model that would lower the corporate tax rate to 25% and eliminate what some consider loopholes.
A simpler tax code will give U.S. businesses a leg up in the race for global investment and economic growth. President Obama has set the stage for corporate tax reform that will make the American economy stronger. While the solution is simple, what the American economy needs is a bipartisan effort to craft and pass legislation.
