December 21, 2008 7:07 pm

US corporate tax policy is in need of reform

It is unfortunate that the US, which has led the capitalist world for so long, is woefully uncompetitive in corporate tax policy. We have the second highest corporate tax rate among Organisation for Economic Co-operation and Development countries and many other tax policies that make it difficult for US companies to compete. Studies such as one done by William C. Randolph of the CBO in 2006 have estimated that 70 per cent of corporate taxes are ultimately borne by the American workforce.

Our tax system is particularly onerous for asset-intensive, industrial businesses such as manufacturers and transport companies. For example, Caterpillar, Boeing, FedEx, commercial airlines and carmakers produce goods and services and provide jobs for millions. But to maintain or increase jobs and compete globally, these companies must be able earn an acceptable return on capital expenditure.

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IN Opinion

How can we make US companies more competitive and increase their ability to offer good jobs? Two things: accelerate the expensing of capital investment; and reduce the corporate income tax rate.

Let us permit US companies to write off all their capital expenditures when they make them, as opposed to the current system of long-term depreciation. Why? Experts such as Ernie Christian and Gary Robbins have said that, over time, every dollar of tax cuts for expensing adds about nine dollars of gross domestic product growth. Even without counting the benefits to the economy of new jobs, it is a relatively cheap option for the US Treasury, since the only cost to the government is the time value of money.

How does this affect American jobs? Let me use an example from FedEx. If we buy a 777 aircraft from Boeing, under the current tax code, we generally write that asset off over seven years for tax purposes. But buying a $150m aircraft is a big risk because you do not know what the market is going to be like when that aircraft is delivered some four years after the order. The best way to mitigate the risk is to allow the company to get that money back quicker. It reduces risk and encourages investment more quickly in equipment, facilities and jobs.

While faster capital expensing is smart tax policy in any case, it is particularly so in times of economic downturn such as the present.

The US also needs to lower its corporate income tax rate. At 39 per cent, it is the second highest in the OECD, behind Japan. The rates of some of our trading partners are much lower – Germany 30 per cent, China 25 per cent, the UK 28 per cent and the Netherlands 26 per cent.

The benefits of multinational trade to the US are well known: more jobs, national wealth, consumer choice, all of which contribute to a better standard of living. Yet tax policy damages our economy. First, we are a less attractive place for foreign companies to do business. Second, we make it harder for US companies to compete with foreign companies outside the US.

Some have questioned why it is important that US companies expand their global businesses. FedEx is a great example because our business is dependent on having a global network. A customer who needs to move inventory from India to Germany will not use FedEx for any of its business if our network does not include those countries. (It does!) More robust growth in our business portends, of course, greater growth in jobs, both in the US and around the world.

But if we must pay 39 cents of every dollar of what we make in corporate income taxes while foreign competitors pay lower (often much lower) amounts, there is no question but that our competitors will have more earnings to invest in new capital projects and jobs.

The US is seriously out of touch with the rest of the world in corporate income tax policy. We must reduce our federal rate by at least 10 percentage points and the states should follow suit. Until we do that, we will continue to fall behind simply because we are standing still.

While the political debate has centred on Wall Street and Main Street or government infrastructure initiatives, I believe expensing capital and lowering corporate tax rates would quickly stimulate additional economic activity.

The beneficial impact on our economy and longer-term federal tax receipts would far outweigh the relatively small near-term increase in the deficit, particularly when compared with other actions such as consumer rebates and/or increased government spending.

The writer is chairman, president and chief executive of FedEx

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