What Works In the Deficit Reform Proposals
The most exciting Bowles-Simpson proposal is changing the corporate tax system. The current U.S. corporate tax is anti-growth and anti-competitiveness. The rate - 35 percent - has become the highest among developed countries, as our competitors have realized the value of a low rate and broad base. Lowering the rate to 26 percent, as Bowles-Simpson suggests, gets the United States back to the middle of the pack.
Having the highest rate is merely disastrous. Even worse, the United States clings illogically to an outmoded system of "worldwide taxation" that every other country has abandoned. The stakes are enormous. Under a worldwide system our firms competing in, say, Brazil are liable for Brazilian and U.S. taxes. A German or Chinese competitor is subject to only the "territory's" taxes - in this case, Brazil's - giving them an advantage over U.S. firms in international competition for 95 percent of the world's consumers. Under the Bowles-Simpson territorial approach, U.S. firms will compete on a level playing field in every market around the globe.
Last but not least, moving to a territorial system will stop the loss of headquarters for large multinational firms. The global competitive disadvantage of a worldwide approach forces firms to move their headquarters abroad. Research facilities and manufacturing operations often follow in short order. Growth and competitiveness are essential to balance the budget. The Bowles-Simpson corporate tax reform recognizes that.
This originally appeared in The Washington Post on November 28, 2010.