Obama's Job Council Recommends Tax Reform

by Mike Godfrey, Tax-News.com, Washington

20 January 2012

President Barack Obama's Council on Jobs and Competitiveness, set up a year ago, has presented its 72-page report, including recommendations to create a simpler, more efficient tax system that “levels the playing field for businesses and makes the US more competitive internationally”.

Overall, in order to enhance economic efficiency, encourage more investment in the US, and boost economic growth, the Jobs Council recommends moving from a corporate income tax system with a high tax rate and a narrow base to one with a broader tax base and a lower overall rate.

The Council pointed out that the US corporate income tax rate of 35% is nearly 10% higher than the average among the US’s competitors in the OECD. It considered that a reduced corporate tax rate is necessary in a global economy in which capital can move easily across borders.

It considered that differences in corporate tax rates have a growing influence on where multinational companies decide to invest. Yet, while most of the US’s competitors have reduced their rates significantly over the past three decades, corporate income taxes in the US have changed very little.

Nevertheless, despite the high tax rate, corporate tax raises relatively little revenue, because the US code has numerous special deductions, credits, exclusions, and loopholes; and, due to its complexity and the incentives for tax avoidance, it results in high administrative and compliance costs of over USD40bn a year. “A growing body of research also shows that in a world of mobile capital”, the report stated, “workers bear a rising share of the burden of the corporate income tax in the form of reduced employment opportunities and lower wages.”

At the same time, the Council has confirmed that the current worldwide system of corporate taxation discourages companies from investing their foreign earnings in the US, and the result is “an outdated and extremely inefficient system that creates economic distortions and puts US businesses and workers at a disadvantage”.

Many Council members therefore agreed that the US should shift to a territorial system of taxation in order to make the US more competitive in global markets. While most other developed nations have adopted territorial systems that exempt most or all foreign income from taxes when they are repatriated, the US still subjects all worldwide earnings to the corporate income tax when they are brought home to the US.

It pointed out that this approach “encourages US companies to keep their earnings abroad rather than investing them here at home. Adopting a territorial tax system would bring (the US) in line with our trading partners and would eliminate the so-called 'lock-out' effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of American companies in the US.”

The Council has also urged Congress and the Administration to begin work on tax reform immediately. “Both parties in the House of Representatives and the Senate should make a public commitment to getting reform done and they should begin the process now,” it recommended.

At the meeting presenting its report, President Obama expressed his opinion that the Council “has been critical in finding new ways to encourage the private sector to hire and invest in American competitiveness. I'm proud that we’ve taken action on a majority of the Council’s recommendations on issues ranging from insourcing to permitting to clean energy. But we also know there's a lot more work to do, which is why we’re committed to continuing to invest in strategies that support job growth.”

However, the House Speaker John Boehner (R - Ohio) replied that: “With this report, President Obama’s own panel of experts has endorsed the approach to job creation House Republicans have been pursuing for more than a year. Nearly 30 House-passed job bills are awaiting action in the Senate, most of which address the recommendations made today.”

Given the continued political stand-off between the Republican-led House of Representatives and the Democrat-led Senate, there are few who would make a bet on the swift passage of legislation through Congress, particularly on the complex issue of tax reform.

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