Good morning, and thank you for joining us today for the latest in the series of hearings the Ways and Means Committee has convened to discuss comprehensive tax reform. Today, we will examine the impact of the tax code on American companies that operate in the global economy – both here and abroad.
In a future hearing, I expect we will examine the opposite side of the international tax coin, namely the way the U.S. treats inbound investments by companies headquartered abroad.
But today, through the testimony of both our CFO panel and our panel of academics and practitioners, we hope to gain insight into how the current structure of the international tax rules affects the ability of U.S.-based businesses operating in a global environment to invest, grow and create jobs.
It’s been 25 years since we reformed the tax code, and almost 50 years since we undertook a bottom-up review of our international tax laws. In those five decades, the global marketplace has changed dramatically.
So too, has America’s role in that marketplace. To illustrate the intersection between America’s tax environment and the global landscape, consider this single data point. In 1960, the largest worldwide companies were nearly all American companies. U.S.-headquartered companies comprised 17 of the world’s largest 20 companies – that’s 85 percent. By 1985, there were only 13, and by 2010, just six – or a mere 30 percent – U.S.-headquartered companies ranked among the top 20.
There are many reasons for this trend, and certainly some of that has to do with the emergence of other strong economies around the world. But without a doubt, a common complaint that we hear from American companies trying to compete abroad is that our tax code, with its complexity and its high corporate rates, acts as a hindrance. The tax code’s antiquated features have diminished the attractiveness of the U.S. as the premiere country in which to locate a business.
So, while the promise of the American dream – having the ability to succeed and prosper – might attract individuals to this country, too many employers and investors are finding that our tax code stands as a barrier to America being an attractive platform from which to grow abroad in ways that create jobs at home.
In our current economic environment, in which our recovery remains in such a fragile state, our tax code ought to be helping create jobs.
America’s combined federal-state corporate tax rate of 39.2 percent is only outpaced by Japan’s rate of 39.5 percent – and Japan has already indicated its intent to lower its rate. Such action will leave America with the highest corporate tax rate in the world – 50 percent higher than the 26-percent average rate for OECD countries.
As if that were not enough, the U.S. is one of the last major economies to operate a worldwide tax system for active business income, which many believe is a further barrier to the growth of American companies.
Capital will find its way to the most profitable opportunities around the world. But when U.S. companies must pay an additional U.S. tax on top of the tax they pay in the foreign market, then that capital is more likely to be invested through foreign companies who do not face this additional tax. As a consequence, American workers lose out on the jobs that would have been created to support those opportunities.
Simply put, the international tax laws that were in place when United States accounted for 50 percent of the world’s gross domestic product (GDP), may have made sense 50 years ago, but today, those same laws are causing America to lag further and further behind.
Ensuring long-term prosperity in the face of increasing global competition requires Congress to re-examine the tax code. As we pursue comprehensive tax reform, this Committee intends to develop solutions that empower American companies to become more competitive and make the U.S. a more attractive place to invest and create the jobs this country needs.
Again, thanks to all of the witnesses for being here today. I will now yield to Ranking Member Levin for his opening statement.