Ivan Pavlov wrote “It is not accidental that all phenomena of human life are dominated by the search for daily bread.” It has long been the case that people and, by extension, the corporations they run, operate on a system of incentives. No place has more experimentation with this concept been done in modern times than with the tax code. There’s a reason that it occupies volumes. In most instances, it is a set of incentives for behavior whether to invest in R&D or buy your first home. There are certainly those who argue that tax code should not be used this way; that it should be simplified but there is almost universal agreement that the system should not be architected to disincent positive behavior.
Back in July, NPR gathered together a group of economists from across the political spectrum from conservative to liberal to libertarian to see if they could agree on a set of recommendations. Unbelievably, they did. One of them was the elimination of the corporate income tax:
Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that’s good. Don’t tax companies in an effort to tax rich people.
While that might seem extreme and is certainly unfeasible politically, countries around the world are waking up to the disincentives to invest that corporate taxes create. Currently, the US has the highest corporate tax rate of OECD countries and stands alone amongst our major trading partners in taxing the worldwide income of US companies. Finally, 26 of the 34 OECD countries offer a permanent exemption for the repatriation of international profits.
Both the high corporate tax rate and the onerous taxation of foreign profits create a competitive disadvantage for foreign companies and operate as an incentive not to invest in the US economy.
Large corporations, and with the evolution of the internet, even smaller ones, operate in a global economy. The United States, with its enormous labor force and extraordinary natural resources has enjoyed an extended period of economic impunity but that time has ended. Now more than half of corporate revenues come from outside our borders. The world has changed, the demographics of the United States have changed and it’s time for us to update our system of incentives to embrace that change and make every effort to help US businesses compete around the world.
As is so often the case, we know what needs doing and the behavior we want to encourage. It is merely politics, not reason that stands in the way of economic evolution. We want US corporations to compete successfully around the world, to invest in domestic R&D, to invest in the domestic workforce. We know how to provide the incentives to do that, at least in some measure, through the reform of the archaic tax code.
The bottom line is this: Foreign revenue is crucial to the domestic growth that creates domestic investment and jobs and accelerates our arduous climb from this recession. IT and IP lend themselves in particular to export growth and businesses large and small need the tax code to be modernized to support investment, R&D and economic recovery.
The time is now because we all do what we are incentivized to do.
Patient: Doctor, it hurts when I do this.
Doctor: Then, don’t do that.