Katherine G. Lugar, Statement
On behalf of the Retail Industry Leaders Association (RILA), I write to offer retailers’ perspectives on tax reform as your committee begins efforts to review our current tax system and undertake fundamental tax reform. RILA supports tax policies that will improve the business climate for retailers, both domestically and internationally, by helping them continue creating jobs and bring price-competitive value to American consumers.
By way of background, RILA is the trade association of the world’s largest and most innovative retail companies. RILA promotes consumer choice and economic freedom through public policy and industry operational excellence. Its members include more than 200 retailers, product manufacturers, and service suppliers, which together account for more than $1.5 trillion in annual sales, millions of American jobs and more than 100,000 stores, manufacturing facilities and distribution centers domestically and abroad.
Principles for Tax Reform
As part of any major tax reform proposal, it is important to recognize that the current rules governing individual taxation and domestic and international taxation of businesses are inexorably intertwined. Accordingly, fundamental tax reform must address all aspects of the tax system. We recommend that Congress focus on the following principles as it considers proposals to reform the nation’s tax system:
- Keep tax rates low – Enabling individuals to keep more of what they earn encourages savings and enables them to make purchases of needed consumer products, which also has the benefit of providing a major stimulus to the economy including sustained, improved retail sales. Similarly, low tax rates help American businesses by increasing capital for investment and job creation.
- Enact simple, predictable and easy to understand tax rules – A tax system that individual and business taxpayers can easily understand will improve compliance and reduce the cost of tax administration.
- Establish tax rules that are consistent with economic reality – For business taxpayers in particular, tax rules need to result in appropriate timing and accurate reflection of income without arbitrary rules that, for example, delay deductions beyond the period in which the income is earned or set depreciation periods inconsistently with the real economic life of the property.
- Ensure the tax system fosters business competitiveness and promotes economic growth – In an increasingly global economy, the tax system should not hinder the ability of U.S. businesses to compete internationally as well as domestically against foreign firms. A tax code that treats business fairly and equitably will minimize burdens on compliance and decision-making, thereby enhancing the productive capacity of U.S. businesses and the U.S. economy.
- Implement reforms that ensure industry-specific neutrality – Business decisions should be based on economic benefits of the particular transaction, not driven by special tax benefits targeted to one industry versus another. The economy does not benefit when the tax code chooses winners and losers. Accordingly, tax reform should allow the marketplace, not the tax system, to allocate capital and resources appropriately.
- Avoid a whole-scale change in the tax base – Dramatic shifts in tax policy, such as implementing a national retail sales or value-added tax, would be immensely disruptive to the economy and particularly detrimental to lower-income workers and families.
- Make changes permanent and ensure certainty – A new tax system must be permanent and stable, not littered with expiring provisions that cause uncertainty for families saving for college and retirement and business striving to expand, create jobs, and remain competitive in the United States and abroad.
- Provide realistic transitions rules – Significant changes to the current tax system will create substantial burdens on taxpayers, especially in the business sector, to ensure compliance. Establishing transition rules that provide adequate time for implementation and that take into account existing agreements, practices, and other requirements is essential for the success of any new tax system.
- Recognize that tax revenues are one part of fiscal discipline – As with any business, long-term fiscal viability requires careful management of both revenues and expenses. The tax-revenue lever can only be pulled so much and so often before it harms the business sector (with resulting effects on tax revenues from businesses, employees, and investments). Equal attention must be given to government spending to strike a reasonable balance with a tax code that fosters economic growth, job creation, and investment.
These principles represent a foundation on which a tax system can be built that will achieve the government’s revenue needs but without the burdens and complexities of our current tax system, which stifle innovation, hinder job creation, and deter overall economic growth.
Growth-Orient Tax Reform: Lower Business Tax Rate
The retail industry is vital to our nation’s economy, representing one of the largest industry sectors in the United States with nearly 15 million jobs and $3.9 trillion in annual sales in 2010. The industry pays billions of dollars in federal, state, and local income taxes, and collects and remits billions more in state and local sales taxes. As you consider tax-reform options, one of the most far-reaching options that the Committee could endorse would be a reduction in the federal tax rates on corporations and other forms of business.
The last major overhaul of the system occurred with the enactment of the Internal Revenue Code of 1986, which substantially reduced the corporate tax rate along with major restructurings to the corporate tax system. Over the ensuing 24 years, Congress has made thousands of changes to the tax code increasing its complexity and the tax rate, resulting in greater burdens for American businesses. Today, the United States has nearly the highest statutory tax rate on corporate income, which has a number of significant ramifications for U.S. retailers.
Overall, high corporate taxes reduce the availability of critically needed capital for business to investment in labor. A number of studies confirm that a significant share of corporate taxes is borne by labor. Thus, a reduction in the tax burden will free companies to create new jobs, increase real wages and income, and improve standards of living for U.S. workers. With the unemployment rate holding above 9 percent, this is a critical opportunity for Congress and the Administration to reverse the job losses that have occurred over the past several years.
Moreover, our current high corporate tax rate hinders retailers’ ability to maintain their existing operation and invest for the future. Especially in the current economic environment where the flow of private-sector capital has been constrained, a lower tax rate would free up essential corporate earnings for investments in new equipment, facilities and products. Similarly, it would enable retailers to retain more of their earnings to reinvest for the long-term growth of their companies, which will contribute to nation’s economic recovery and ultimately to sustained economic expansion.
Looking beyond the domestic benefits, a lower corporate tax rate also holds significant potential for improving the competitiveness of U.S. businesses. In recent years, a growing number of U.S. retailers have expanded into the global marketplace through the establishment of both retail operations in other countries as well as subsidiaries that strengthen the supply-chain of goods and services they provide to their customers. Unfortunately, the United States is set to have the highest corporate tax rate in the world once Japan enacts its proposed rate reduction, and this country remains one of the only countries with a system for taxing worldwide income. As a result, the United States has created a difficult environment for its multinational businesses to compete in the global economy. And, further exacerbating this situation, other members of the Organization of Economic Cooperation and Development (OECD) have been pursuing measures to reduce their tax rates. Lowering the U.S. corporate tax rate would help level the playing field for U.S. multinationals and encourage companies to keep jobs and investments in this country.
At the same time, it is important to recognize the tremendous growth in the number of businesses operating as pass-through entities (e.g., partnerships, limited liability companies, S corporations, and sole proprietorships), including some RILA members. These business taxpayers are critically important to the U.S. economy and must be taken into consideration in the tax-reform debate if overall tax reform is to be successful.
For the foregoing reasons, RILA encourages the Committee to endorse a significant reduction in the rate applicable to U.S. corporations and other forms of business as a step toward improving the business climate for retailers, both domestically and internationally, which will help the retail industry continue creating jobs, investing in new equipment and technologies, and contributing to the nation’s long-term economic growth.
Anti-Growth Tax Reform: National Sales Tax
While tax reform is important and can contribute to economic growth and job creation, we strongly believe that adoption of a national sales or value-added tax (VAT) would be antithetical to those goals. Regardless of whether this tax is imposed through the manufacturing process or at the point of retail sale, the victim of this tax will ultimately be the American consumer who will face higher prices at the register.
Sales taxes are highly regressive and pose particular harm for low- and middle-income consumers who spend a higher percentage of their earnings on basic necessities such as food, clothing, and household products. In addition, state and local governments already apply sales taxes to many goods and services – which a number of states have increased in recent months to address revenue shortfalls resulting from the current economic situation. A similar tax at the national level would simply add to the tax burden consumers are increasingly asked to shoulder.
Moreover, the retail industry represents the third largest employer in the United States – behind only government and healthcare. A national sales or value-added tax would significantly depress retail sales and have a devastating impact on this important sector of our national economy and the critical jobs it provides. Such a tax would also create significant administrative burdens for retailers already responsible for complying with the complex federal income tax system and the remittance of disparate state and local sales taxes.
Finally, from the perspective of leveling the international playing field, a VAT would only worsen the competiveness of American businesses. As noted above, the United States will soon have the highest corporate tax rate while our major trading partners are actively lowering their tax rates. As a result, adding a VAT in this country would increase the tax burden on American businesses and intensify the competitive disadvantage they already face in trying to compete in a global economy.
With the nation’s economy continuing its slow recovery, the last thing this country – our businesses and our consumers – needs is a new supplementary tax system that will increase retail prices and threaten American jobs. Accordingly, we do not believe there is any room at the table for a national sales or value-added tax.
Thank you for this opportunity to present our views on tax reform. RILA and its members look forward to working with the Committee to implement meaningful tax reform that includes provisions that support the retail industry and help it create jobs and grow.