Taxes: It's Time for Compromise
What Business Wants
American chief executives, whether they sit atop a sprawling multinational or work nights and weekends on a startup, think tax rates on business must be cut sharply. "I hear a lot of 'We're going to tax this or we're going to tax that,' " says Michael Dell, chief executive of computer maker Dell (DELL). "But how do we stay competitive? Jobs don't get created with new taxes."
Dell and others point out that the U.S. corporate tax rate, at 35%, is now second only to Japan's. Over the past decade, countries ranging from Ireland to China have slashed corporate rates and offered up a slew of tax incentives to lure jobs. The U.S. will have to do the same thing or it will continue to see its job base decline, warns William D. Watkins, CEO of disk-drive maker Seagate Technology (STX). He makes no bones about the fact that he takes the best deal he can get. "At the end of the day, how do I make my company stronger?" Watkins asks. "I move all my plants offshore. How long is it before I move all my R&D?"
Of course, most companies don't actually pay 35%. Thanks to a myriad of tax breaks, the actual rates that companies pay can vary widely. But the complexity of the tax system—and the sense that it encourages companies to make decisions based on tax advantages rather than strategic sense—have led to widespread business support for an overhaul of the corporate tax code. Last year such top executives as Jim Owens, CEO of Caterpillar (CAT), and Fred Smith, head of Federal Express (FDX), threw their support behind a proposal by Treasury Secretary Henry Paulson to cut the overall rate to as low as 28% in return for an end to many tax breaks. Representative Charles B. Rangel (D-N.Y.), the powerful chairman of the tax-writing House Ways & Means Committee, has floated similar proposals.
Spurring U.S. Investment
Problem is, no one agrees on which tax breaks are reasonable and which are egregious. It's especially hard to reach consensus on the question of taxing income earned overseas by American companies. Currently, the U.S. doesn't tax such profits until the foreign subsidiary transfers the money back home. U.S. companies say that if they had to pay Washington taxes on that income while it was still parked abroad, they wouldn't be able to compete in foreign markets where rivals pay lower or no taxes.
But many Democrats want to end the deferral, which they believe encourages companies to shift jobs abroad. Corporate lobbyists already are sounding the alarm. "Ending foreign deferral is a recipe for driving U.S. companies out of foreign markets, where most of the growth lies," says Ed McClellan, a former Republican tax counsel for the Senate Finance Committee who is now with PricewaterhouseCoopers. "It's a big worry for a lot of companies."
Rather than penalize overseas operations, many CEOs say the new President should use tax policy to encourage investment at home. Marijn Dekkers, CEO of instrument maker Thermo Fisher Scientific (TMO), believes an Obama Administration should support better incentives to locate new factories in the U.S. And like many entrepreneurs, Rick Warner, head of ParkingCarma, a Flint (Mich.) online startup, thinks taxes on small business should be cut. The U.S. needs "trickle-up financial incentives," he says. "No capital-gains tax for small or startup business owners, [including] their investors, up to the first liquidation, sale, or IPO."
What's Likely to Happen
Barack Obama's tax policy is likely both to please and to antagonize companies. Obama wants to use the tax code to encourage more investment at home, but he also vows to end the tax deferral on foreign income. Many Democrats are already eyeing the large pot of revenues that could be raised that way: The Treasury Dept. estimates that U.S. companies will escape $120 billion in taxes over the next decade by keeping profits offshore. Obama has also talked of ending "tax loopholes" for oil and gas companies, and he proposed a windfall profits tax when gas hit $4 a gallon. Capital-gains taxes on small businesses and startups, on the other hand, would be eliminated.
As for an overall cut in corporate rates in exchange for ending tax breaks, Obama has said he's open to the idea. He could take up the issue as part of a broad effort to tackle both corporate and individual rates, as Rangel wants. But after a campaign centered far more on middle-class tax cuts, there's little sign a corporate tax cut is a priority.
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