President-elect Donald Trump campaigned on putting a stop to businesses and jobs leaving the country. Already, he has followed through on this promise by saving close to 1,000 jobs when Carrier agreed to keep its Indiana plant open.
While any effort to save jobs should be applauded, the longer term solution to stopping the flight of American businesses isn’t through special deals, but passing tax reform that lowers rates and modernizes the code so we have a tax system that is competitive once again.
Tax reform may finally be within reach next year. There is broad agreement between Trump and the “Better Way” plan put forward by House Speaker Paul Ryan (R-Wis.) and Ways and Means Chairman Kevin Brady (R-Texas). Passing tax reform based on the ideas set forward in both plans will not only stop business and jobs from leaving, it can be the centerpiece of a broader pro-growth agenda that replaces the past eight years of stagnant economic growth.
It has been more than 30 years since the tax code was reformed, and in that time the world has changed drastically. When President Ronald Reagan signed the Tax Reform Act of 1986, our corporate tax rate dropped to a state/federal average 39 percent – five percentage points below the average rate in the world, which was 44 percent.
During those three decades, other countries have cut their rates aggressively, while ours remains unchanged as the highest in the developed world. Since 2000, competitors like Canada (26.3 percent), the United Kingdom (20 percent) and Ireland (12.5 percent) have all reduced their rates and have reaped the benefits of stolen American jobs and businesses.
People, not businesses, ultimately pay taxes, and so this high rate directly results in suppressed job creation, reduced wages and lackluster economic growth as confirmed by study after study. In fact, one study by the Business Roundtable notes that as much as 75 percent of the corporate tax is borne by workers. Similarly, research by the American Enterprise Institute estimated that every $1 increase in the corporate rate leads to a $4 decrease in wages over the long term.
Not only does the high rate suppress wages, it has also led to the direct flight of American businesses that have left through an inversion or have been acquired by a foreign competitor. Close to 50 American businesses have been forced to leave the country over the past decade through an inversion, and the U.S. has had a net loss of $179 billion in assets over that time, according to a 2015 report by Ernst and Young. With a 10 percent reduction in the rate, the study estimates we would have a net shift of $769 billion, equivalent to 1,300 businesses.
These numbers should not be surprising given complex and confusing rules of our tax code. The U.S. system even subjects American businesses operating globally to double taxation – once when it is earned in the country where business activity takes place, and again when that money returns to America. Almost every other country does not try to tax the foreign activities of their businesses, so there is a clear disadvantage (and incentive) to move operations out of America.
Fixing this problem should be a priority in 2017, and it can be done by lowering the corporate rate to 15 percent as proposed by Trump, or 20 percent as proposed by House Republicans. Both plans would reduce our rate to below the developed average and replace our outdated worldwide system of international taxation with a streamlined territorial system as part of a set of reforms that allow American businesses to compete against foreign competitors.
If President Trump signs pro-growth tax reform into law there will be no need for special deals to keep businesses in America. Fixing the underlying competitiveness problem will result in businesses investing in America, instead of clamoring to leave or investing overseas.
Alexander Hendrie is a federal affairs associate at Americans for Tax Reform.
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