Tax Excerpt of Romney Economic Plan Available

• INDIVIDUAL TAXES

• Maintain marginal rates at current levels

• Further reduce taxes on savings and investment

• Eliminate the death tax

• Long-term goal: pursue a flatter, fairer, simpler structure

• CORPORATE TAXES

• Lower the corporate income tax rate to 25 percent

• Transition to a "territorial" tax system

Tax policy shapes almost everything individuals and enterprises do as they participate in the economy. With bad design, tax policy can discourage economic activity. With good design, it can encourage it. Yet our current tax system is an accretion of decades of patchwork decisions that came into being with no systematic thought for their implications for job creation or economic growth. Every year, individual taxpayers are forced to confront a Rube Goldberg contraption of bewildering complexity that leads to a range of undesirable outcomes, including the fact that millions of Americans have to pay hundreds of dollars to have their tax returns prepared by a professional who understands the rules. Corporations, for their part, are subject to rules and regulations that all too often encourage tax gamesmanship while discouraging reinvestment in the American economy.

The Obama Approach: "Eat Our Peas"

In approaching the nation's fiscal challenges, President Obama has repeatedly called for a "balanced approach," by which he means cutting spending but also raising taxes. That may sound appealing on the surface. However, the reality is that before President Obama exploded the size of the federal government, our existing tax rates were more or less adequate to pay for the government we needed. President Obama claims now to be offering a compromise. In fact, by undoing only some of the harm he has inflicted on our fiscal health over the past three years, he would ratchet up permanently the size of government and the tax burden on the American people.

To make the case for a permanently expanded government, President Obama has laced his speeches with inflammatory rhetoric. He aims to pit lower- and middle-income Americans against so-called "millionaires and billionaires" (he actually includes every household earning more than $250,000 in that category), whom he asserts are not paying their fair share. The blame game is politically counterproductive in that it directly undermines the possibility of the very kinds of compromises that the President purports to be seeking and that America in fact needs. It is also economically counterproductive in that it places under attack the very investors and job creators Washington should be encouraging.

President Obama's proclivity for fostering uncertainty about the long-term shape of the tax code is particularly troublesome. He has embraced one temporary solution after the next while rejecting permanent adjustments that would bring some predictability and stability to investment decision-making. The result is a business climate marked by hesitation. When President Obama complains about banks refusing to lend and businesses refusing to hire, he should consider the impact of his own policies on that state of affairs.

No discussion of President Obama's tax policies would be complete without a reference to Obamacare and its $500 billion in tax increases. Whenever President Obama discusses the need for more tax revenues, Americans should remember that he already got them and spent them on a health care scheme that is itself proving to be hugely disruptive to the economy. Embedded in the program is a full panoply of taxes that fall disproportionately on some of the most innovative -- and fastest-growing -- sectors of the American economy. The very biotechnology firms whose billions of dollars in research and development have done so much over the past 25 years to conquer one disease after the next will find that such investments make less sense. The consequences of this will be invisible, but all Americans will suffer them in the form of cures that go undiscovered.

Mitt Romney's Plan: Promote Savings and Investment

Mitt Romney will push for a fundamental redesign of our tax system. He recognizes that we need to simplify the system. He also recognizes that we need both to lower rates and to broaden the tax base so that taxation becomes an instrument for promoting economic growth. We also need to find a way to keep the tax structure stable so that investors and entrepreneurs are not confronted with a constantly shifting set of rules that makes it impossible for them to plan ahead.

INDIVIDUAL TAX RATES

Mitt Romney believes in the conservative principle that Americans, to the maximum extent possible, should be able to keep the money they earn. Unfortunately, as Benjamin Franklin wrote, there are only two things that are unavoidable: death and taxes. We need taxes to pay for the operations of government. But they should be collected by a system that is simple and fair, and that causes the least possible disruption to the productive economy.

The federal estate tax has become a political football in recent years. The tax was temporarily eliminated in 2010, was reinstated in a last-minute deal between Congress and President Obama at a top rate of 35 percent for 2011 and 2012, and is slated to bounce up to 55 percent in 2013. As president, Mitt Romney will work to eliminate the tax permanently. All told, the negative effects on savings, investment, and job creation show how pernicious an estate tax can be. For those reasons, it should be stricken from the books as soon as possible.

 

Figure 4: The Burden of Tax Complexity

 

Costs of the Income Tax System

 

 

 

Source: Office of Management and Budget; The Laffer Center

THE CORPORATE TAX SYSTEM

Our system of corporate taxation is also in urgent need of an overhaul. Right now, with a top marginal rate of 35 percent, it vies for the developed world's highest, placing our companies -- indeed, our entire country -- at a competitive disadvantage. That is the bad news. The good news is that with the rate set so high, there is a lot of room to bring it down.

Worries that a lower corporate tax rate are unfair or unaffordable are fundamentally misplaced. The truth is, as Mitt Romney likes to say, "corporations are people." They represent human beings acting cooperatively to be economically productive. Each dollar earned by a corporation is a dollar that ultimately flows, in one form or another, to employees or to shareholders. And those shareholders include the millions of Americans who own shares in mutual funds or who have pensions that invest in the American economy.

High corporate tax rates do not even accomplish what they are intended to accomplish. Studies of the American tax system have demonstrated that higher corporate rates do not necessarily lead to higher revenues. In fact, high corporate taxes can discourage business activity and encourage practices aimed at avoiding tax liability. It is for this reason, perhaps, that corporate tax revenue in the United States is consistently lower than that in other OECD countries, despite our high tax rates.

 

Figure 5: Falling Behind the Curve on Taxes

 

 

 

Source: Organisation for Economic Co-operation and Development

Other countries have recognized the direct correlation between a lowered corporate tax rate and an increased competitive advantage. At least 75 countries, including some of our largest trading partners, have cut their corporate tax rates in just the past four years. Earlier this year, the United Kingdom began incrementally reducing its corporate rate, first from 28 percent to 26 percent, with the goal of reaching 23 percent in 2014. In January, Canada cut its rate from an already low 18 percent to 16.5 percent, with another reduction to 15 percent scheduled for next year. Aside from these major trading partners, there is broad movement among OECD nations in the same direction. Excluding the United States, combined statutory rates among OECD nations fell from an average of about 48 percent in the early 1980s to 25.5 percent in 2010.

Our high corporate tax rate handicaps the overall U.S. economy in our competition with the rest of the world. It leaves individual American businesses with a smaller portion of their profits to reinvest. Studies have shown that it also hurts workers, by lowering the growth in productivity and wages. With a single bullet, we are somehow managing to shoot ourselves in the foot three times. We need to move to a lower rate. As president, Romney will press for an immediate reduction of the corporate tax rate from 35 to 25 percent. He will also explore the possibility of coupling further rate reductions with measures that broaden the income base and simplify the rules to ensure that American businesses will always be competitive in the global economy.

Transition to a "Territorial" Tax System

As president, Mitt Romney will also act immediately to alter those of our tax laws that encourage American multinational companies to park their profits permanently overseas. The United States currently operates under what is known as a "worldwide" tax system, meaning that business income is taxed at the U.S. rate regardless of whether the income is earned within American borders or overseas. Under this collection method, American companies pay the corporate tax in the host country, and when profits are repatriated back to the United States, the company pays the difference between what was paid to the host country and what would have been owed under the U.S. rate. Given our higher rates, the effect of this is to penalize those U.S. corporations that bring their foreign profits home to invest in the United States. It is a deeply irrational system that benefits the rest of the world at our expense. It needs to be changed.

Other nations have noted the competitive disadvantage inherent in a worldwide tax system, resulting in a gradual movement of countries converting from a worldwide to a "territorial" system, in which income is taxed only in the country where it is earned. Of the 34 OECD member nations, 26 have either a full territorial system or something very close to it. Alone at the top, the United States is now the only country in the OECD that adheres to the worldwide system while imposing a corporate tax rate above 30 percent.

Romney supports the recommendation of the Bowles-Simpson Commission to make the switch to a territorial system. This would enhance the ability of our corporations to compete around the world and would end the perverse incentives that keep companies from repatriating profits to the United States. Domestic companies that can compete vigorously abroad are in a better position to grow and create jobs at home. Complex technical issues will arise during the transition: amendments to the tax code need to be crafted in a way that does not encourage corporations to game the system and export jobs or to move their U.S. headquarters abroad. With proper draftsmanship, these potential hazards can be overcome. A territorial system must be designed to encourage the creation of jobs in the United States, not to outsource them. A Romney administration will begin work on the transition to a territorial system on day one. As much as $1 trillion, that could be invested in the United States, is at stake. It is past time to eliminate tax laws that place American firms at a competitive disadvantage, decrease revenue, and diminish corporate investment in America.

A robust investment tax credit, extending the write-off for capital expenditures for an additional year, and a lower payroll tax could each have a positive effect if properly structured. But such measures are no substitute for the longer-term structural reforms to our tax system that are required to place the economy on sound footing for a recovery. Nor do they address the many other failures of policy that have brought us to our current predicament. The only cure for what truly ails the economy is a fundamental change in how government interacts with the private sector. Government should move from an adversarial posture to one that fosters an environment in which the private sector can flourish. Fixing the tax code is an important first step, but much more is required.

To the vast majority of Americans who have held real jobs in the real economy, often in corporations, the point made perfect sense. Indeed, it seemed a statement of the obvious. A corporation, after all, is nothing more than people who have joined together to work cooperatively. The word "corporation" itself means "body of people." And in fact, corporations consist of two groups of "people": employees and shareholders. The former work hard to make a profit and earn their salaries and benefits. The latter, now dispersed widely across the economy by means of mutual funds and retirement-plan investment portfolios, provide the capital and can reap the financial benefits while also assuming the financial risks.

Nonetheless, Democrats in Washington pounced on Governor Romney's comment as if it were some sort of embarrassing gaffe. The Democratic National Committee (DNC) produced a video advertisement attempting to ridicule him. Debbie Wasserman Schultz, the chairwoman of the DNC, issued a statement calling Romney's words a "shocking admission."

A shocking admission? What's shocking here is actually that Democratic politicians believe they are scoring a point. The attitudes they display toward corporations explain a good deal about the current status of our economy after three years of Barack Obama's failed attempts to bring down the rate of unemployment.

The people attacking corporations obviously do not understand what is at stake. Sun Microsystems, which I co-founded way back in 1982, began with only four employees. Four "people," that is. It eventually grew into a workforce of more than 40,000, based primarily in the United States. That's a lot of jobs. It is a safe bet that the number would have been even higher if every year Sun had not been taking a significant fraction of its profits and turning it over to the Internal Revenue Service.

That money could have been reinvested in the company so that we could produce new and better computers, or it could have been sent directly to shareholders in the form of dividends, producing a better return on their investments and thereby attracting even more investment capital. The new employees receiving the money as salary to work on the new products, and the shareholders receiving the money as dividends in return for their investment, would still have paid taxes on it. But more economic activity would have occurred.

Sun did well -- we had great products and great people -- but we no doubt could have done even better if we had been appreciated by many in Washington as a group of people rather than treated simply as a revenue stream.

Right now, the corporate tax rate in the United States is 35 percent. That is one of the highest rates among developed countries. In a globalized economy where investors can move money and facilities around the world with ease, it means that we discourage investment in the United States. Meanwhile, loopholes favor those with the best lobbyists. If we close loopholes and lower the tax rate, the American people and corporations will win.

Other things being equal, an entrepreneur contemplating starting a new company will certainly include our high rate of taxation in decision-making about where best to locate a headquarters and facilities -- not just which state, but which country. Even more significantly, that entrepreneur must take into account the share of profit to be extracted in taxes when deciding whether the potential rewards of starting a business or hiring new workers are worth the associated risks. Many business risks worth taking at a low tax rate become unattractive at a high one.

As Mitt Romney points out in his plan to get America working again, high levels of taxation not only hurt investment in the United States, but they also fail to accomplish what they are ostensibly intended to accomplish: namely, to raise maximum revenue. The high rates simply serve to discourage investment and also encourage activity aimed at reducing tax liability. It is not an accident that even as the United States has the near-highest corporate tax rates among OECD countries, its corporate tax revenue lags behind.

The suspicion with which corporations are regarded by the Democratic Party these days may go a long way toward explaining why we are living with tax policies that leave American firms -- and our country as a whole -- at a severe competitive disadvantage with rivals around the world. It also goes a long way toward explaining why President Obama has failed to produce an economic recovery. The answer lies in addressing American competitiveness, not redistribution of wealth.

Scott McNealy is the founder and former CEO of Sun Microsystems.