The policy issue that could have the greatest impact on the future of technology is one that most people wouldn’t consider a technology issue at all. But the fact is, corporate tax reform can play an essential role in maintaining U.S. global innovation leadership and in expanding technology services to more Americans.
Today, U.S. businesses are taxed at a rate of 35 percent, one of the highest corporate rates among developed countries. Leaders on both sides of the aisle recognize the primary consequence of a high rate is a higher cost of capital, lower investment and lower long-term growth. But less attention is paid to the fact that reduced corporate taxes and modernized tax rules can help ensure a business environment that allows start-ups to grow faster, research and development into new innovative services and products to flourish, and business investment in essential communications networks to continue at a steady pace.
The tech and telecom sectors, comprised of the companies that build and maintain today’s broadband infrastructure, are vital contributors to our nation’s prosperity and progress. All combined, the companies delivering high-speed internet access across the country provide more than 2.9 million jobs and represent a total economic impact of more than $421 billion. Over the last twenty years – and after $250 billion invested – this industry has created one of the most dynamic and robust broadband infrastructures in the world, connecting over 100 million U.S. homes to the digital economy. At the same time, manufacturers and suppliers in the broadband supply chain enable 5.7 million jobs and represent 5 percent of American GDP.
Of course, you could look at this and say that these companies have done all of this while paying very high tax rates, so there’s no need for reform. But imagine what could be unleashed in a more hospitable environment! If one thing is clear in today’s tech environment, it’s that the next decade will be far different from the last.
International competition, particularly from countries that heavily subsidize and promote their tech industries, has grown much more intense. We’re also seeing a growing number of countries putting up barriers to digital trade, forcing American companies to spend more to operate or sell outside of the United States.
At the same time, businesses of all sizes need faster and higher capacity broadband to deliver the entertainment, products and services that consumers are demanding. And as companies seek to grow and flourish in this connected world, through smart communities, connected transportation, and the “Internet of Things,” high-speed broadband serves as the lifeblood that drives the explosive growth of these new technologies. To deliver on all of this, private sector companies must make increasingly expensive investments in the development, building and maintenance of communications networks.
But America’s leadership in technology could be in for a rude awakening if these growing connectivity demands continue to face the economic realities of an extraordinarily high corporate tax rate. The dampening impact on investment will not only threaten many job and growth-creating opportunities, but it will mean that communities across America that lack broadband connectivity will remain on the wrong side of the digital divide.
Significantly, the U.S. House Tax Cuts and Jobs Act released on Nov. 2 appropriately recognizes that we can ensure investments in innovation and high-speed networks – and the associated jobs, progress and connectivity they enable by lowering the corporate tax rate, bringing earnings back to the United States, creating a territorial system to encourage companies to keep profits at home, and continuing research and development tax credits.
And importantly, the House’s tax reform bill deftly preserves the longstanding principle of interest deductibility through the use of a “thin cap” – as opposed to a flat percentage “haircut” – which allows for interest deductibility to remain available for broadband companies and their suppliers. Broadband and mobile providers require substantial capital for two key purposes. First, such capital is necessary to deploy the latest, most effective and most efficient technology solutions, and second, to build-out to underserved or completely unserved areas of the country, particularly rural communities. Either eliminating interest deductibility outright, or limiting it through the use of a flat percentage “haircut,” would make borrowing even more expensive, and force delays or cancellations of planned investments. There’s no question that this would slow both job creation and technological progress. Thankfully, the recently released House tax reform bill hits all the right notes on interest deductibility. The U.S. Senate should quickly follow suit.
Right now, we have the best opportunity in years to move forward with tax reform. As Congress considers the impact of changes to the tax code, it must look forward – and recognize that reform is necessary to make sure our country continues to be the global technology leader and to release the full potential of innovation to create jobs and strengthen our economy.
Wes Johnston is the CEO of the Telecommunications Industry Association and brings more than 25 years of experience leading and transforming technology and telecom businesses, having held board and senior executive positions with large global technology firms before joining TIA.
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This post has been updated to reflect the House’s tax reform legislation.