Taxed to the Max

Hefty tax rates continue to penalize U.S. companies, and the calls for reform are growing louder.

William Blaylock, vice president and senior tax counsel for $12.5 billion semiconductor maker Texas Instruments Inc., says those efforts should proceed with caution, because removing incentives could endanger gains. In 2007, TI’s effective tax rate on continuing operations was about 29 percent, reflecting, among other things, the benefits of the manufacturing deduction, the research credit, and the ability to defer paying U.S. taxes on foreign-generated income.

“From a competitive standpoint, eliminating deferral would be a very troublesome issue for global companies,” Blaylock says, though he concedes it would largely disappear if the tax rate were brought into line with the global competition. If the United States simply stopped taxing foreign profits completely, of course, the issue of deferral would disappear entirely.

Blaylock also would like to see Congress make permanent the research-and-development tax credit that was first introduced in 1981 but has survived only by virtue of annual extensions. President Obama is reportedly committed to making it permanent. His Administration could do even more to help U.S. manufacturers, Blaylock adds. “If people wanted to look at doing something about [increasing] manufacturing capacity in the U.S., an investment tax credit would be attractive as well,” he says.

During the Presidential campaign, Obama said he wanted to change tax laws that reward companies for shipping jobs offshore and retaining earnings overseas. But whatever legislation along those lines becomes law, notes Rosanne Altshuler, co-director of the Tax Policy Center, a joint venture of the Urban Institute and the Brookings Institution, it is almost certain to unleash fierce protest from multinational corporations.

And there you have it: widespread dissatisfaction with the status quo versus fears that any changes will be for worse rather than better. No wonder the stalemate has persevered for so long. That’s certainly good news for tax experts, who seem unlikely to be disintermediated by a simplified system any time soon. But the prognosis for companies is far less clear. They pay a large price to win and maintain their breaks. While some might come out ahead if the system were changed, it could be hard to get them to accept that, particularly when Washington vows to make U.S. companies more competitive even as it prowls for more tax revenue.

But a quarter century is a long time to go between major rewrites of something as critical as the corporate tax code. Given all that has changed, and all that needs to change, it seems high time to go beyond the usual give-and-take.

Randy Myers is a contributing editor of CFO.

To see the tax rate for all 30 OECD countries, click here.

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