Caterpillar CFO Says U.S. Must Retool Tax Code With Lower Rates

Congress must revamp the U.S. tax code by lowering corporate rates and adopting a territorial system of taxation for overseas profits, said Edward Rapp, group president and chief financial officer of Caterpillar Inc. (CAT)

Rapp spoke at a briefing for reporters on Capitol Hill today held by chief financial officers of some big corporations. He said a lower corporate rate is needed so U.S. companies can be competitive globally.

“We need to do a teardown of our corporate tax structure,” said Rapp. Caterpillar is based in Peoria, Illinois.

Rapp suggested that a 25 percent corporate rate, with 20 percent or 21 percent from federal taxes and the remainder from state taxes, would make the U.S. competitive with businesses based in other industrialized countries.

The corporate income tax currently tops out at 35 percent.

In rebuilding the corporate tax code, lawmakers should strive for a lower rate and adopt a territorial system for taxing overseas profits, Rapp said. They should also include incentives for developing intellectual property.

Lawmakers also need to consider questions about the structure of the economy, such as whether they want to foster manufacturing jobs, Rapp said.

Research and Development

Rapp said that although two-thirds of Caterpillar’s sales are outside of the U.S., the bulk of its $2 billion global research and development budget is spent domestically.

“It’s a key part of our global network,” Rapp said.

He didn’t offer details as to what tax expenditures Caterpillar would be willing to give up for a 20 percent or 21 percent U.S. corporate tax rate.

Rapp suggested that lowering rates corporate tax rates could lead to higher tax revenue.

“If you improve competitiveness, do you improve growth that leads to higher revenues?” Rapp asked.

Robin Beran, Caterpillar’s chief tax officer, who also attended the briefing, said “it would be pretty hard to get there on a revenue neutral basis.”

John Buckley, a former House Democratic tax counsel, said in a phone interview today that “you couldn’t get to that rate without increasing the deficit.”

Buckley, now a visiting professor at Georgetown University in Washington, also said lawmakers could choose to target a rate focused more narrowly to manufacturers, who already benefit from a manufacturing tax deduction and in many cases have the ability to move operations offshore.

Taxing Manufacturers

“You logically could do it with manufacturers. They’re already paying a reduced rate and they could leave,” he said.

Another executive at the briefing, Kurt Kuehn, chief financial officer of Atlanta-based United Parcel Service Inc. (UPS), said businesses must be flexible as they suggest changes to the tax code.

“We see all tax expenditures being on the table,” Kuehn said.

UPS is a member of the newly formed RATE Coalition, a business group that includes Boeing Co. (BA), Nike Inc. (NKE) and AT&T Inc. (T) It advocates for lower corporate tax rates.

The RATE Coalition, (short for Reducing America’s Taxes Equitably) doesn’t specify by how much the corporate rate should drop.

Kuehn said he thinks it’s better to achieve a framework for lower rates before tackling other corporate tax issues such as repatriation of overseas profits.

“We see repatriation as a secondary issue,” he said.

Kuehn said a temporary tax holiday sought by some companies holding profits outside the U.S. is “a Band-Aid,” and not a solution to the offshore tax issue.

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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