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Phillip J. Bond

January 20, 2011

Phillip J. Bond, Statement

I write today on behalf of TechAmerica on the importance of fundamental tax reform and the need to create a globally competitive system that spurs capital investment and job growth and to caution against piecemeal modifications to the corporate tax rules. Unless Congress acts now, and in a comprehensive manner, the United States will surpass Japan to have the highest statutory corporate tax rate in the developed world.

TechAmerica is the leading voice for the U.S. technology industry, which is the driving force behind productivity growth and jobs creation in the United States and the foundation of the global innovation economy.  Representing approximately 1,200 member companies of all sizes from the public and commercial sectors of the economy, it is the industry’s largest advocacy organization. It is also the technology industry’s only grassroots-to-global advocacy network, with presence in state capitals around the United States, Washington, D.C., Europe (Brussels) and Asia (Beijing). 

As consideration of fundamental tax reform begins, we urge Congress and the Administration to stay focused on the goal of developing a globally competitive taxation system that fosters innovation and job creation.  We urge you to avoid any interim proposals that would make our taxation system even less competitive, create further uncertainty, or hinder future investment.  Chipping away at the tax code while the tax reform debate gets under way would also be counter to the President’s goal of creating a system that supports economic growth and investment in the United States.

According to TechAmerica Foundation’s “Cyberstates 2010” report, the U.S. high tech industry directly employs 5.8 million people at 375,600 establishments with a payroll of $516 billion, accounting for 10 percent of total U.S. private sector payroll.  Indirectly, the U.S. tech industry supports over 20 million jobs.  U.S. high-tech workers are paid an average wage of $84,400, which is 86 percent higher than the average private sector wage.  The vitality of this industry is inextricably tied to its competitiveness worldwide, and the United States would benefit from a modernized tax code that accounts for innovation and is designed to compete globally with other countries that are effectively recruiting more business and investment through favorable business and tax policies.

As the United States continues to focus on entrepreneurship, global competitiveness and job creation, tax reform should embrace the principles of an “innovation economy.” Those principles include recognizing the valuable contribution of incentives such as those for research and development, tax law stability, and the recognition that in a global economy, expanding operations overseas enhances U.S. productivity and is essential for future growth in the nation’s GDP.

U.S. high-tech companies of all sizes operate overseas to be near their customers.  Some small and mid-sized companies generate as much as 97 percent of their revenues overseas, with many large companies earning more than three-quarters of their income outside the United States.  As global competition has grown, other countries have adopted taxation systems that bolster the ability of their companies to compete in foreign markets and increase investments at home.   As the United States undertakes an effort to fundamentally reform the tax code, we must recognize the reality of a global economy – and the positive connection between strong overseas operations and U.S. investment.

TechAmerica urges Congress and the Administration to resist any piecemeal reforms to the international tax rules that would make U.S. companies less competitive.  In order to grow and create jobs in the United States, U.S. companies must invest, operate and compete for business all around the world.  Overseas investment leads to greater success selling goods and services globally, which under the right tax structure, should significantly fuel domestic capital investment, domestic job creation and increased domestic investment in research and development activities.     

In recent years, other countries have recognized the inverse relationship between corporate tax rates and capital flows, and have successfully increased capital investment by lowering corporate tax rates and enacting incentives that attract high-paying jobs.  This spring, after Japan lowers its statutory corporate tax rate, the United States will have the highest rate among the OECD countries.  In 1986, the United States lowered its top corporate tax rate to one of the lowest in the world, and other countries followed suit.  Not only does a lower rate help U.S. companies compete, but it also encourages foreign companies to invest in the United States, resulting in increased employment and higher wages for American workers. 

Even as other countries have lowered their corporate tax rate, they also have recognized the importance of investment and job creation by adopting incentives for research and development (R&D) activities.  Again, the United States once had the most generous R&D credit among the OECD nations; however, the U.S. credit currently does not even rank in the top ten among those countries.  With more than 70 percent of credit dollars being attributable to the wages and salaries of workers in the United States, the R&D tax credit is a domestic jobs credit.  In an increasingly competitive global environment, reforming the tax code to include a stronger and permanent credit would help make the United States a more attractive location to perform R&D.

The tax code should help facilitate business decisions that benefit the U.S. economy, but in order to make long-term planning decisions, companies need clarity and certainty in the regulatory system.  There has been significant bipartisan support for incentives such as the R&D credit over the years; however, there have also been proposals that would actually encourage companies to perform R&D elsewhere, creating uncertainty for companies. In addition, the credit has been allowed to expire more than a dozen times, also depriving companies of the ability to make long-term decisions relating to how much R&D they can perform in the United States. 

Undertaking a tax reform effort provides a rare opportunity to examine our current system and consider how it can be made more competitive by fostering innovation and job creation rather than deterring it.  The greatest challenge is to understand and anticipate the effects that any change has on the overall tax burden.  Reform is inherently an exercise in interwoven and interdependent features such that any change needs to be viewed in light of overall compliance and total tax burden concerns. TechAmerica urges this Committee to keep these issues in mind when considering tax reform proposals – or any interim proposals that could make our current system less competitive. 

In conclusion, TechAmerica would like to emphasize two points.   First, to summarize, we believe the ultimate goal should be to avoid a piecemeal effort that would hinder innovation and investment.  Instead, Congress should focus on developing a globally competitive taxation system that fosters innovation and job creation.  Second, because our member companies have substantial operations in countries all over the world, they know the ingredients for success in the technology sector, and they know how to compete.  Please feel free to consider the experience and expertise of our members as an ongoing resource available to your committee in your work on tax reform.