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Sun., July 7, 2013

Fix corporate taxes, bring about prosperity

The May jobs report shows that the American economy added 175,000 positions. Positive employment growth is welcome news, of course. But May’s gains weren’t big enough to make a dent in the national joblessness rate, which actually ticked up to 7.6 percent.

Meanwhile, revenue at most U.S. companies continues to grow as firms expand operations and accumulate capital. Yet this progress hasn’t precipitated a proportional expansion in hiring.

This lag has long been a source of frustration on Capitol Hill. Perhaps yet another month of anemic job growth will actually jolt policymakers into action.

The best way for Congress and the president to encourage businesses to translate growth into new jobs is to reform the corporate tax code. The labyrinthine monstrosity that is the American corporate tax system is soaking up billions in resources and scaring off companies from directing capital into job-generating enterprises.

The issue of corporate tax reform was recently a hot topic after Apple Chief Executive Tim Cook took the stand at a Senate hearing in May. Cook had been called in to defend his company’s long-standing “alchemic” accounting practices, including warehousing more than $100 billion in cash in overseas subsidiaries, mainly in Ireland, that pay little or no corporate taxes.

Despite all the bluster from the Senate committee members, however, it quickly became apparent that Apple wasn’t doing anything illegal. As a publicly held company, Apple was simply meeting its fiduciary responsibility to legally maximize shareholder value. Fellow global powerhouses such as General Electric, Google, Exxon Mobil and Microsoft are doing likewise.

Indeed, nearly half of Fortune 500 companies hold major assets overseas. Legally maximizing profits should not be viewed as an indictment of good corporate character.

The committee should have spent its time discussing the abnormally high statutory U.S. tax rates and the mind-boggling complexity and opacity of the code itself. The accounting muscle required to successfully navigate the corporate code soaks up a tremendous amount of brainpower and resources, which could be going toward real wealth-producing enterprises.

There is a basic line of reform that should be palatable to both political parties. For Democrats, it wouldn’t require caving to free-market fanaticism or abandoning a progressive code. For Republicans, it wouldn’t require ballooning the federal debt but would genuinely reduce the tax burden on private enterprise.

To start, simply lower the rate itself. Currently, the U.S. taxes corporate earnings at 39.1 percent. That’s easily the highest rate among member nations of the Organization for Economic Cooperation and Development, the premier international group for advanced economies. The average OECD country’s corporate rate is fully 14 percentage points below ours.

Critics might point to the effective rate paid by U.S. companies – who can forget when news emerged that General Electric paid zero U.S. taxes in 2010? But that’s an issue with deductions, credits and loopholes. The rate itself crushes countless businesses and hurts U.S. competitiveness.

Over the last two decades, 32 OECD nations have cut corporate taxes. Meanwhile, we’ve raised ours – twice.

Such a disparity in tax rates inevitably entices companies to invest overseas or just keep their earnings in cash. President Obama has called for lowering corporate taxes to 28 percent. That’s a good starting point for negotiations, but ultimately the rate should be much lower, ideally down to the single digits.

Next, Washington needs to seriously streamline the corporate system and eliminate the most perverse special-interest carve-outs. The corporate code stacks up to 70,000 pages. Such complexity serves as a drag on the economy and inevitably puts larger, more established companies at an unreasonable competitive advantage. Big companies can afford to hire lobbyists and accountants to squeeze out the most benefits from the code. Their smaller competitors cannot.

Reducing the corporate rate and streamlining the code would attract investment back to American shores and stimulate job creation. Research from Cornell and the University of London demonstrates that even a 1-percentage-point cut in the U.S. corporate rate would stimulate 0.4 percent to 0.6 percent GDP growth within a year. Indeed, a 2008 study from the OECD concluded that “corporate income taxes appear to have the most negative effect on GDP per capita.”

The thinking on Obama’s second term is that it’s bogged down in scandal and petty partisan point-scoring. Championing a smart and serious corporate tax reform bill would get this administration back on track and, if passed, it would constitute a landmark legislative achievement. If we don’t fix the corporate code, job growth will continue to stall and America will risk permanent economic stagnation.

Yuri Vanetik is a principal at a private equity real estate firm and a fellow at the Claremont Institute. He wrote this for the Los Angeles Times.

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