When it comes to taxes, U.S. is, unfortunately, a global leader

The combined state and federal tax rate of 39.1 percent is one reason both Democrats and Republicans are pressing for comprehensive tax reform that gets U.S. taxes to a more competitive level. Another reason is that American companies that earn money abroad get taxed twice, unlike most of their foreign competitors.

In 28 of the 34 OECD countries, corporate earnings are only taxed in the nation where they are earned (a territorial tax system). But under U.S. law, a company must pay taxes in the country where income is earned and again when those earnings are brought back to the U.S. (a worldwide tax system).

This double taxation represents a competitive disadvantage for U.S. businesses. As a result, the only way U.S. companies can do business in other countries and remain competitive is to keep their foreign earnings abroad. That means an estimated $2 trillion held by U.S. companies is not being directly deployed into the U.S. economy. With U.S. GDP growth at an anemic 2.5 percent, we could certainly use the additional investment here.

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Our stunted economy coupled with the realization that the U.S. tax code is out of date has built broad bipartisan momentum for tax reform. However, some in Congress want to limit the benefit of tax reform for one group of businesses – the tech and biotech companies that have been the backbone of U.S. economic growth for the last 30 years.

The House Ways & Means Committee Discussion Draft on international tax reform favors a tax reform proposal that would discriminate against companies that create software, medicine and idea-based services that the tax code refers to collectively as “intangible property,” in contrast to tangible products such as cars or food crops.

In the last few decades, companies that produce intangible property have fueled our economic growth and are our strongest competitors abroad. Last month, the Bureau of Economic Analysis reported that spending on intangible assets added $471 billion to 2012 U.S. GDP. Companies that produce intangible assets employ more than 27 million workers in the U.S. and are responsible for 60 percent of our exports, according to economist Matthew J. Slaughter of Dartmouth’s Tuck School of Business.

At the heart of the Discussion Draft is a plan to almost completely phase out the tax on income earned by U.S. corporations overseas.  The one exception would apply to income earned from intangible property. Ultimately, this proposal would create a system where foreign income from intangible property would be subject to a U.S. tax rate that is at least 12 times greater than the tax rate for income from tangible property and services.

So why would we discourage the most important engine of our economy, the businesses that create and thrive on intellectual property?

The rhetoric is that some companies have artificially transferred intangible property to other countries to avoid paying the high U.S. tax rate. But if the U.S. tax system were fair and rational, there would be no incentive to transfer intangible property elsewhere and trillions of dollars would come home.

Certainly, Congress should remove incentives for companies to inappropriately attribute earnings to foreign countries, but in doing so we cannot punish the businesses that have contributed the most to our country’s prosperity. Rather, we must encourage innovative companies and future entrepreneurs   who will build the next Microsoft or Netflix in the U.S.

Congress should modernize our antiquated and harmful tax system, but it must do so in a way that does not discriminate against intangible income. President Obama recognized the importance of these companies to our economy when he said, “our single greatest asset is the innovation and the ingenuity and creativity of the American people. It is essential to our prosperity and it will only become more so in this century.” Thus, we should avoid proposals that discourage innovation and growth, particularly at a time when other countries are doing so much to displace the United States as the global leader in entrepreneurship.

Kyl served 18 years in the U.S. Senate before leaving in Jan. 2013. He is now a senior advisor at Covington & Burling LLP where he advises Microsoft, a member of the Tax Innovation Equality (TIE) Coalition, which focuses on tax issues.