Tech group on tax reform: Simpler doesn't always mean better

Policymakers’ push to make the tax code simpler and stop the government from picking winners and losers is the wrong approach to corporate tax reform, a new paper from the technology sector argues.

The Information Technology and Innovation Foundation (ITIF) study contends that the U.S. tax code should promote what it sees as more deserving investments in areas like research and development. The analysis argues that insisting on a revenue-neutral overhaul of the corporate tax code could limit economic and job growth.

“In a world of intense international economic competition and a U.S. economy increasingly powered by innovation, a tax code that does not proactively ‘distort’ the investment decisions of enterprises in the United States is one that is doomed to leave the United States behind in international competition,” the paper argues.

Top policymakers — including in the Obama administration and leading Democrats and Republicans on congressional tax-writing panels — have generally voiced support for a revenue-neutral approach to tax reform, and for making the tax code simpler.

“We believe the tax code should boost American competitiveness,” Sen. Max Baucus (D-Mont.), the Finance Committee chairman, said in his prepared remarks for a joint hearing of the Finance and House Ways and Means committees last week. “It should encourage economic growth and job creation. It should be fair, simple, efficient and certain.”

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Treasury Secretary Timothy Geithner has also dismissed the idea of a corporate tax overhaul bringing in less money at first, an idea the ITIF appears to want considered.

“We're not going to ask Americans to pay higher taxes so we can lower taxes on businesses,” the secretary said in February.

But the ITIF study underscores the point that, as The New York Times reported earlier this year, higher-tech industries like biotechnology and pharmaceuticals pay effective tax rates of around 5 percent, while car dealers pay much closer to the statutory corporate rate of 35 percent.

In its report, ITIF suggested it was fair for grocery stores, utility companies and car dealers to pay more, because the services they provide make them less mobile and do not face the same global competition challenges that higher-tech industries do.

“If the taxes on steel companies, drug companies and electronics companies are raised, they will act as any rational company would by moving some production to nations that tax them less,” the report said.

The report also calls for a stronger research and development credit, arguing that the current U.S. credit is less generous than those offered in Brazil, China and India. The credit is also currently not permanent, and has been renewed 14 times in its roughly 30 years of existence.

The Obama administration, while also backing corporate tax reform, has called for making the current R&D credit permanent, while a House proposal would expand the credit as well.

In recent congressional hearings, business executives and advocates have expressed frustration with the current tax incentives for R&D, in large part because of the lack of certainty that surrounds the credit.