Wednesday, April 3, 2013
Peterson Institute for International Economics, Corporate Taxation and U.S. MNCs: Ensuring a Competitive Economy (April 2013):
The debate about “tax reform,” a focus of the 2012 presidential race and the congressional budget battles this year, has centered on closing loopholes, creating new incentives for growth, and of course raising revenue through higher personal taxation of well-off Americans. This emphasis is understandable in light of the need to close the federal deficit and the fact that a majority of federal revenue comes from personal taxes. But the debate overlooks an important priority for future U.S. economic growth: the urgent need to reform the corporate tax. Without reform, U.S.-based multinational corporations (MNCs) will continue to be hobbled by an outmoded tax structure as they compete in the age of globalization. Reform would not only make American MNCs stronger competitors in markets abroad but also enable them to expand and invest more at home.
This policy brief proposes that tax rates should be lowered, both on profits earned in the United States and profits earned abroad. These reforms will encourage greater, not less, investment at home, as well as expanded foreign direct investment abroad by American MNCs. This is the best path toward more employment, investment, exports and R&D in the United States. Yes, this proposal might seem counterintuitive to some. Indeed the Obama administration has suggested that taxes should be used to discourage outward FDI by American MNCs, on the ground that such investment hinders U.S. prosperity. We present evidence that the administration’s concern is the wrong starting point for launching corporate tax reforms. This policy brief first summarizes research that shows a complementary relationship between outward foreign direct investment by U.S. MNCs and positive effects in the U.S. economy, and then proceeds to suggest constructive corporate tax reforms. The policy brief argues that fears of lost revenues from lowering taxes on corporate profits earned at home and abroad are exaggerated, and that MNCs which engage in FDI are in the best position to create jobs and promote prosperity at home.
(Hat Tip: Bruce Bartlett.)