For the United States to remain a global economic leader, we must have a tax code that enables American businesses to flourish and compete in global markets. Tax reform is essential for U.S. companies that transact business in other countries. But reforms cannot target any industry or type of income for discrimination–including income derived from intangible property.
Intangible property refers to the ideas that spearhead the creation of new products or processes. Although they cannot be touched or seen, intangibles wield tremendous value. They include: manufacturing processes, copyrights and patents, and the intellectual property behind products and services that are sold throughout the world. From software and devices, to biologic medicines, the most essential and widely used inventions derive from valuable investments in intangible property.
Recent tax reform proposals aim to treat overseas intangible income, such as income from licensing software, differently than other types of income, harming U.S. companies whose income relies on intangible property. This will put the innovative industries that help power the U.S. economy at a significant disadvantage to their foreign competitors, and will seriously undermine America’s status as a global economic leader.
How do intangibles help us?
Intangible property is the driving force behind many American jobs–55.7 million, to be exact. According to the Global Intellectual Property Center at the U.S. Chamber of Commerce, in Wisconsin alone, 60 percent of jobs (1,493,142) are either directly or indirectly created through intangible property. Fifty-six percent of Ohio’s jobs (2,688,497) are directly or indirectly derived from intangibles, as are half of Utah’s jobs (566,196).
In the last several decades, companies that produce intangible property have powered U.S. economic growth, acting as the force behind 60 percent of our exports. The Bureau of Economic Analysis reported that spending on intangible assets contributed $471 billion to U.S. GDP in 2012.
According to Professor Matthew Slaughter of Dartmouth, as of 2010, the intangible property-intensive industries in the U.S. that created high rates of patents, trademarks, and copyrights, accounted for 18.8 percent of U.S. jobs, employing around 27.1 million Americans. These same industries supported another 12.9 million U.S. jobs through their supply chains, and represented 34.8 percent of the U.S. GDP. Further, the average compensation in these industries towered over the rest of the private sector by 42 percent–an income premium that nearly doubled from 22 percent in 1990.
What is at stake?
The tax reform proposals in former House Ways and Means Chairman Dave Camp’s Discussion Draft, the Tax Reform Act of 2014, seriously threaten the wide-ranging contributions of intangible property. Foreign-based companies would have a major advantage over U.S. companies who compete globally, resulting in significantly more inversions of these companies. The effects on our country’s innovative technological companies and groundbreaking biopharmaceutical companies would be devastating.
What can be done?
Rather than changing the tax code to discriminate against intangible property, it is essential that Congress oversee the implementation of comprehensive tax reform that will modernize the U.S. tax system, and enable U.S. companies to compete in a global market.
There are a number of steps that will increase U.S. competitiveness. The implementation of a competitive territorial tax system is paramount. Currently, the U.S. operates a worldwide tax system, which taxes income in the country where it is earned. It is taxed again when it is brought back, or repatriated, to the U.S. This has resulted in many companies keeping foreign-earned profits outside the U.S.
A territorial tax system would not double tax the income earned by U.S. companies abroad. It will allow them to compete with their foreign competitors who are only taxed once, and it will encourage U.S. companies to reinvest their foreign-earned profits back in America.
Secondly, the U.S. corporate tax rate must experience a marked reduction for U.S. companies to be competitive. The combined U.S. state and federal corporate tax rate is the highest in the developed world. Congress must level the playing field between American companies and their foreign counterparts.
Finally, it is essential that no industry or type of income is discriminated against. By ensuring that industries and incomes across the board are subject to equal standards, the U.S. will be in a position to maintain global leadership.
Rep. Paul Ryan (R-WI) understands that the corporate tax code is holding back the economy and incentivizing American companies to move their operations overseas. He has addressed this dilemma by encouraging the passage of corporate tax reform now. The goal is to reinvigorate our stagnant economy and to maintain a business culture that energizes creative and innovative thought.
To accomplish this goal, a new tax system must treat U.S. companies’ intangible property like other types of assets. Ideas and thoughts may be intangible, but they have a tremendous impact on the United States’ ability to compete in global markets and remain a global economic leader. To improve the United States’ competitive advantage in the global economy, it will be critical that President Obama, tax-writing Committee Chairmen Ryan and Orrin Hatch (R-UT), and Senate Finance Committee Ranking Member Ron Wyden (D-OR) reach a compromise that creates a competitive tax system without disadvantaging the very types of innovation upon which America has become a bastion of creativity and growth.
Alan Baratz is the CEO of Alert GPS, a company specializing in personal safety technology for consumers, government and enterprises with workers in high-risk positions.