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COMMENT: The US emergency: corporate tax reform to define presidential election

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The British emergency services telephone number is 999. In times of trouble, this is the number that is relied on for help and, interestingly enough, this same number was the initial spark that propagated the focus on a particularly troublesome issue in the US – corporate tax reform.

Former Republican presidential candidate Herman Cain proposed his 9-9-9 tax plan and his bold declarations to implement a flat 9% corporate tax, 9% personal income tax and 9% national sales tax threw radical corporate tax reform into the mainstream to such an extent that the next US president may be decided on the back of his policies in this area.

Commentators have been describing the November presidential election as likely to hinge on jobs and job creation, but the direction of President Obama’s tax policies – or at least his corporate tax policies – is inextricably linked to such job creation. He would measure the success of his tax policies by their impact on creating jobs, and this was confirmed again last week when Obama focused on job creation in his State of the Union address.

And on the Republican side of the debate, the GOP candidate will have at the heart of his election campaign a significant corporate tax rate reduction (we need not even make predictions between Mitt Romney and Newt Gingrich as all the nominees are in agreement that the rate must come down). The disclosure, and subsequent scrutiny, of Romney’s effective tax rate has only continued to add fuel to the fire and intensify the strength of the spotlight on tax policy.

In his State of the Union speech, the President called for tax reform bills – mainly those directed at insourcing jobs – to be presented to him, promising to sign them “right away”.

“Right now, companies get tax breaks for moving jobs and profits overseas. Meanwhile, companies that choose to stay in America get hit with one of the highest tax rates in the world. It makes no sense, and everyone knows it,” said Obama.

The overriding imagery of the speech was that of teamwork and camaraderie, stressing the need to cast aside political affiliations and work together for the good of the country, with the President invoking military rhetoric and referencing the US Navy SEAL mission to kill Osama bin Laden to press home the need for teamwork and convergence on tax policy issues.

“My message is simple,” Obama summarised. “It’s time to stop rewarding businesses that ship jobs overseas, and start rewarding companies that create jobs right here in America. Send me those tax reforms, and I’ll sign them right away.”

But with a corporate tax system that could be described as upside down – with companies that establish operations in the US paying taxes at rates up to 45% or 50% when state and local taxes are factored in, while companies that produce offshore and ship their products into the US for sale there pay little tax – and a corporate tax rate that stands well above the OECD average of 25%, it is going to take more than political posturing for meaningful reform and, in turn, job creation. As Senate Majority Leader Harry Reid recently said: “This has become an emergency”.

Further reading:

Obama on tax code: “Let’s change it”

What the US Republican presidential candidates have to say about corporate tax

The challenges of cutting the US corporate tax rate

Boeing, FedEx and Nike demand lower US corporate tax rate

US Senate witnesses agree on corporate rate reduction, but not territorial system

9-9-9 tax plan may never be implemented, but certainly raises debate on US VAT

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