The United States has always prided itself on being a place that fosters new ideas and business endeavors, and for good reason. That success, however, is now at risk as indicated by the current debate over corporate-tax inversions — U.S. companies heading overseas to take advantage of simpler tax codes and more competitive corporate-tax rates in other nations.
Let's face it: The inversion debate is symptom of an underlying reality. Our high corporate-tax rates — the highest in the world — and our incredibly complex tax structure are eroding our economic leadership.
For more than two centuries, entrepreneurs and risk-takers have chosen the United States to begin new ventures. However, the current tax code is forcing American companies to move elsewhere, and new startups might be considered foolish to even contemplate the United States with its current tax structure.
House Ways and Means Chairman Dave Camp, Michigan Republican, recently posed the question, "How many more companies have to be headquartered or based in lower-tax jurisdictions before we get the message?"
Despite mixed signs of economic growth, our uncompetitive, overly complicated tax code continues to stymie expansion and investment. In fact, a recent Ernst & Young study found that owing to reductions in the corporate income-tax rate enacted abroad over the past several decades and as a direct result of our high corporate rate, U.S. gross domestic product in 2013 was estimated to be reduced by 1.2 percent to 2.0 percent. The same study showed that over the long term, U.S. wages would be depressed by 1.2 percent — unless we do something about our corporate rate.
What to do?
When asked just a few days ago how to create jobs, former President Bill Clinton responded, "I think we should start with corporate-tax reform."
Sen. Orrin G. Hatch, Utah Republican and ranking member of the Senate Finance Committee, expressed a similar sentiment when he stated his solutions to inversions: "Tax reform, if it's done right, will get at the root problem, rather than simply dealing with symptoms."
Thankfully, our elected officials are beginning to understand the dire economic consequences of America's tax code, and even more importantly, there is wide agreement on what needs to be done to fix it. In fact, there is a model for how to modernize our tax system.
In 1986, America undertook the most significant reform in decades to streamline what was then a complicated and inefficient tax system — and to make our country the ideal place to start and headquarter a business. Democrats and Republicans came together to clean out the underbrush and design a code that encouraged businesses to grow, invest and hire. Their goals were straightforward — a tax code that allowed businesses to focus on their bottom lines and families on their wallets — and for a while, it was a success. That effort spurred America's macroeconomic success for years afterward.
Today, however, almost three decades have passed, and the United States finds itself once again burdened by an out-of-date code and an uncompetitive tax rate. More troubling, while our corporate-tax system holds back our economy, other nations are not standing still. Competitors such as the United Kingdom, Canada and other economic rivals are aggressively slashing their corporate-tax rates to encourage investment and economic expansion — and the results are telling. American companies are moving abroad at an ever-increasing pace, taking corporate headquarters and much-needed U.S. jobs with them. Such high-level outsourcing leaves its mark. Companies that have been the foundations of communities for decades in states such as Ohio, New Jersey and Delaware can now be found in Dublin, London and Tokyo.
The key to real, meaningful tax reform is a lower corporate-tax rate. Everything else is secondary. A lower rate leads to a simpler, fairer tax system, which will in turn lead to fewer incentives for companies to move abroad. American businesses are not moving overseas because they want to, but because economic forces are leaving them with no other choice.
There is no doubt that tax reform is difficult to achieve — otherwise, it would have been accomplished by now. Leading companies understand the need for reform and are willing to put their respective tax exemptions on the table in return for a modern code and internationally competitive rate. Change is never easy, and for some companies, eliminating special tax breaks may be painful, but a simpler, fairer tax code will expand growth and opportunity across American industry.
Our leaders cannot let America's economic leadership be the next thing to leave our shores. They need to take a lesson from 1986 and give businesses the tax structure necessary to grow, invest and hire. It's simple. An internationally competitive rate and a simpler and fairer code will spark real economic growth and keep companies in the United States — and now is the time to get to work.
The sooner our elected officials arrive at the correct conclusion and tackle tax reform, the stronger our economy will be.
James P. Pinkerton and Elaine Kamarck are the co-chairmen of the RATE Coalition.