Why foreign leaders love the U.S. tax system

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WASHINGTON, March 13 (UPI) -- The U.S. system of taxing business stifles growth and destroys jobs. Non-financial firms are sitting on $2 trillion of cash but a cash hoard is no reason to invest -- not when the U.S. corporate tax rate is the second highest in the world at 39 percent (federal plus state).

Foolishness doesn't stop at the border. The United States imposes a substantial tax penalty, often around 30 percent, when U.S. corporations return profits earned abroad to build plants or pay dividends.

With rules like these, it's no wonder that our nation is mired in a dismal recovery.

Other countries have slashed their corporate taxes time and again so that the average statutory rate in advanced countries (excluding the United States) is around 28 percent. China's rate is only 25 percent.

Other countries sensibly exempt profits earned outside their borders from home country taxation. This approach, known as "territorial taxation," has become the world norm but Uncle Sam marches out of step.

The combination of low corporate tax rates plus territorial taxation creates a powerful lure for factories and research-and-development centers. The combo acts as a magnet for drawing corporate headquarters to cities such as Toronto, Frankfurt, London and Hong Kong -- but not to New York, Chicago or Los Angeles. In fact, it has gotten to the point where young companies looking to establish headquarters frequently insist on anywhere but the United States.

Large corporations, defined as those employing more than 500 people, provide jobs for more than 30 percent of U.S. workers. They pay 50 percent higher wages on average and provide 10 percent more working hours per week compared with smaller businesses.

U.S. companies that employ more than 5,000 people finance more than two-thirds of private-sector R&D. Size matters: it ensures that companies have the resources to create new products and make and sell them on a global scale. These ingredients not only deliver U.S. leadership in sectors ranging from aircraft to energy to information technology to medicine and more, they also deliver high pay and secure jobs to millions of American workers.

But America cannot rest on its past industrial glories. In a world defined by competition, a nation's gross domestic product counts right alongside military strength.

Unfortunately, since 2008, the United States has slipped from first to fifth in annual competitiveness rankings. While other nations have reformed their tax structures to attract major corporations, the Obama administration continually toys with ideas for raising taxes on the largest and most successful U.S. firms.

One recurring proposal with congressional sponsorship would sharply increase taxes on U.S. oil and natural gas companies, giving a leg up to foreign companies, like the Spanish energy firm operating just 60 miles off the Florida coast in Cuban waters. Other proposals would handicap a range of U.S. companies in a variety of tax traps.

Fortunately, most lawmakers recognize that the U.S. corporate tax system is a walking disaster. A reform chorus is calling for a cut in the federal corporate tax rate to 25 percent and a tax rate capped at 8 percent on profits returned from abroad.

Unfortunately -- and despite powerful evidence -- the Congressional Budget Office ignores the growth effects of these proposals and applies static analysis to score them as revenue losers. In an era of deficits and debt, those CBO scores are a sure killer to sensible reforms.

How can congressional reformers overcome the CBO bean counters? Here's one idea.

Accept the CBO's 10-year projection of corporate tax revenues under current law as the legislative target. Enact the reforms but couple them with a requirement that rates will spring back to their old levels (and then some) if revenues fall short of the CBO projections after five years. With that proviso, the CBO scorekeepers will have no choice but to assign a revenue score of zero or better to a corporate rate cut and territorial taxation.

In other words, with imagination the United States can reform its business tax system and stay in the game of world competition. It can do all this without making the difficult task of curbing the federal deficit any harder.

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(Gary C. Hufbauer is the Reginald Jones senior fellow at the Peterson Institute for International Economics and author of a recent report: "U.S. Tax Discrimination Against Large Corporations Should Be Discarded."

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)