Comprehensive Business Tax Reform

Issue:

America’s tax system is out of date and not competitive. Last updated in 1986, the OECD finds U.S. business tax rates are now the highest in the world. Congress must enact reforms that lower the U.S. business tax rate and move the U.S. toward a territorial tax system. While comprehensive reform will take time, a temporary repatriation of U.S. foreign earnings should be a part of any tax reform proposal to return $1.4 trillion to the U.S. economy.

Recent Updates:

Brocade and Varian Medical Systems CEOs provided anecdotes about their experience in 2004-2006, during the last repatriation tax reduction, when they brought back over $200 million and hired over 4,000 new employees combined.

“Brocade is seeing dramatic increases in demand around the world for data center solutions which enable virtualization and cloud computing to improve business agility. Brocade repatriated approximately $75 million in 2005. These monies were used to support workers’ wages and compensation, growing our businesses and strategic investments.  Since 2005, Brocade has increased its U.S. headcount both organically and through acquisitions from nearly 1,000 employees to more than 3,500 at the end of 2010.  We support bringing this money home, now, so we can continue growing and expanding.”

– Michael Klayko, CEO, Brocade, and Chairman of Silicon Valley Leadership Group’s Board of Directors
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“Many companies who are seeking to expand their U.S. operations would benefit from this policy change. As the only airline based here in Silicon Valley and as one of the few U.S. carriers growing and creating new jobs, we know that bringing this money back home will help drive economic growth for our region.”

–David Cush, CEO and President, Virgin America Airlines, and member of Silicon Valley Leadership Group’s Board of Directors

“Intersil has long supported a change in the repatriation tax rate, and we’ve called upon Congress numerous times to address this issue. We employ people in some of the fastest growing markets within the communications, consumer and industrial electronics industries.  So many of the economic and business challenges we face today involve difficult tradeoffs.  Yet the issue of repatriation is an easy one – reducing this onerous tax rate will bring a significant amount of money back to the U.S. for our re-investment purposes, and raise some tax revenues in the process.”

– David Bell, CEO, Intersil, and member of Silicon Valley Leadership Group’s Board of Directors

“Varian is seeing substantial growth and demand in international markets, where many countries are clamoring for our cancer treatments and technology. We want to use what we’re earning over there here at home, for research and development, operations and wages.  Our record speaks for itself:  Varian repatriated approximately $128 million in 2006, using the funds for acquisitions, R&D initiatives which improved cancer care and made the company more competitive abroad, expansion of manufacturing capabilities in Salt Lake City and Las Vegas, and a workforce that grew from 3,900 people to 5,300 at year-end 2010.”

– Timothy E. Guertin, President and CEO, Varian Medical Systems, and member of Silicon Valley Leadership Group’s Board of Directors

Action:

Why is this important to Silicon Valley, California and the U.S?

The Silicon Valley Leadership Group applauds Congressional and President Obama’s support to energize the U.S. economy by revamping the U.S. business tax system.

A recent study by the Milken Institute, “Jobs for America,” concluded that reducing the U.S. business tax rate to the current average of Organization for Economic Cooperation and Development (OECD) countries would stimulate economic growth and create more than two million jobs in the U.S. by 2019.

The United States now has the highest statutory business tax rate among the major industrial countries in the OECD. Among other developed nations, only the U.S. taxes foreign income. This places businesses at a distinct competitive disadvantage since most foreign competitors are not required to pay a similar tax to their home countries. This particular aspect of the U.S. tax code poses real challenges when it comes to global investment decisions and the return of foreign profits to the U.S.

Ninety five percent of the world’s consumers live outside of the United States. For U.S. companies to serve these markets and increase jobs in the United States, they must be able to compete internationally on a level playing field.  In fact, 22 million Americans work for U.S. multinational companies while millions of other Americans are employed by the thousands by small and medium-sized companies that supply and service U.S. multinationals.

A reduction in the corporate tax rate might be accompanied with other proposed reforms such as reevaluating whether foreign tax credits are necessary given that they are utilized as an offset against the high corporate tax rate. Strategic opportunities to repatriate foreign earnings would free up much needed capital for U.S. jobs and the economy. The current U.S. tax rate of 35% provides such a large disincentive that few U.S. multi-national companies choose to bring foreign earnings home to the U.S.

Background & Legislative Status:

The U.S. Senate Committee on Finance and U.S. House Committee on Ways and Means have been holding a series of hearings on overhauling the tax code. Current themes from the hearing include: Reducing complexity/costs and increasing U.S. competitiveness by enacting broad-based tax reform.

Early in 2011, President Obama had expressed a commitment to energize the U.S. economy by making America and its corporations more competitive, as well as the President’s pledge to reform an anti-competitive U.S. business tax system. However, at the beginning of February, the President released his budget proposal to Congress which includes preliminary budget cuts and “offsets” by making changes to the international tax regime that it calls “closing loopholes.”

The “Debt Reduction Super Committee” concluded the need for a lower business tax rate distributed more broadly.

Caucus answer to this issue:

The Democrat Caucus is split among traditionally heavy industrial manufacturing states – who oppose lowering the business tax rate particularly for U.S. multinational corporations claiming they are shipping jobs overseas. Furthermore, they generally share skepticism that U.S. multinational companies will honor their promise to reinvest foreign earnings back into U.S. jobs if repatriated at a lower tax rate.  The supporters include more moderate-leaning Democrats, who recognize that U.S. multinational companies operate outside the U.S. to compete and reinvest in jobs back in the U.S. The Republican Caucus (with exception of fiscal hawks) generally supports the notion of lower broad-based tax rates.