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Making America More Competitive Through Tax Reform

Council Member Fred Smith, founder and CEO of FedEx, discusses how tax reform can make American companies more competitive in the global marketplace

December 22, 2008

Fred Smith

Fred W. Smith, Founder and CEO of FedEx

It's unfortunate that the United States, which has led the capitalistic world for so long, is woefully uncompetitive in the area of corporate tax policy. We have the second highest corporate tax rate among all Organization for Economic and Cooperative Development (OECD) countries and many other tax policies that simply make it difficult for U.S. companies to compete with those outside the U.S. Is this important to you? You bet—studies, such as one done by Dartmouth's Matthew J. Slaughter in 2004, have estimated that 70 percent of corporate taxes are ultimately borne by the American workforce.

The reality is that our current tax system is particularly onerous for asset-intensive, industrial businesses like manufacturers and transportation companies. For example, Caterpillar, Boeing, FedEx, commercial airlines and automakers use real assets to produce goods and services and provide jobs for millions of workers in the United States. But to maintain or increase the number of jobs and to compete globally, these companies must be able earn an acceptable return on the massive capital expenditures they make.

How can we make American companies more competitive in the global marketplace and increase the ability of those companies to offer good jobs to American workers?

Two things:
  • accelerate the expensing of capital investment; and
  • reduce the corporate income tax rate

Accelerating the Expensing of Capital Assets Upon Acquisition

Let’s permit U.S. companies to write off all of their capital expenditures when they make them, as opposed to the current system of long-term depreciation. Why? Experts Ernie Christian and Gary Robbins have said that over time, every dollar of tax cuts for expensing adds about nine dollars of GDP growth. And even without counting the benefits to the economy of new jobs, it’s a relatively cheap option for the U.S. Treasury, since the only cost to the government is the time value of money.

So how does this impact American jobs? Let me use an example from FedEx. If we buy a 777 airplane from Boeing, under the current tax code, we generally write that asset off over seven years for tax purposes. But buying a $150 million airplane is a big risk because you don't know what the market's going to be like when that plane is delivered some four years after the initial order. So the best way to mitigate the risk of making that capital purchase, which provides jobs for pilots, mechanics, ground support, hub workers, and couriers, is to allow the company to get that money back quicker. It reduces risk and encourages investment more quickly in new equipment, facilities and jobs.

While faster capital expensing is smart tax policy in any case, it is particularly so in times of economic downturns such as the one we are in now.

Lowering the Corporate Tax Rate

The United States also needs to lower its corporate income tax rate. At 39 percent, it is the second highest in the OECD, behind Japan. The corporate income tax rates of some of our major trading partners are much lower—Germany, 30 percent; China, 25 percent; the UK, 28 percent; and the Netherlands, 26 percent.

The benefits of multinational trade to the U.S. are well-known—more jobs, national wealth, consumer choice—all of which contribute to a better standard of living. Yet with our high corporate income tax rate, U.S. tax policy damages our economy in two ways. First, we are a less attractive place for foreign companies to do business—after all, we take a higher percent of their profits. Second, we make it harder for our U.S. companies to compete with foreign companies outside the United States, thus limiting the ability of our companies to profitably grow their businesses.

Some have questioned why it is important that U.S. companies grow their global, as opposed to just U.S., businesses. FedEx is a great example because our business is truly dependent on our having a global network. The more limited our network, the more limited our growth opportunities. A customer who needs to move inventory from India to Germany won’t use FedEx for any of its business if our network does not include those countries. (It does!) More robust growth in our business portends, of course, greater growth in jobs, both here and around the world. And that’s exactly what has happened—our international growth has fueled our U.S. growth, and vice-versa.

But if we must pay 39 cents of every dollar of what we make in corporate income taxes while foreign competitors pay lower (often much lower) amounts, there is no question but that our competitors will have more earnings to invest in new capital projects—and jobs.

The United States is seriously out of touch with the rest of the world in terms of corporate income tax policy. Let’s reassert our leadership. Let’s take steps now to enable this country, our businesses and our workers to compete fully. We must reduce our federal corporate income tax rate by at least 10 percentage points, and the states should follow suit. Until we do that, we will continue to fall behind the rest of the world simply because we are standing still.

No Better Stimulus for the Economy

With the U.S. and global economies in recession, now is the time to change the tax code.

While the political debate has centered on Wall Street and Main Street (financials and consumers) or government infrastructure initiatives, I believe expensing capital and lowering corporate tax rates would quickly stimulate significant additional economic activity and job creation. Industrial corporations would be spurred to advance new technology and productivity-enhancing investments because the risks of doing so would be substantially reduced. This would certainly be true in the case of FedEx, and I have yet to have a major corporate CEO disagree.

The beneficial impact of these changes on our economy and longer-term federal tax receipts would far outweigh the relatively small near-term increase in the deficit, particularly when compared to other actions such as consumer rebates and/or increased government spending.

The resulting improvements in national productivity and competitiveness would substantially benefit the U.S. economy. 

This article was featured in the Financial Times on December 22, 2008.

 

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Lisa Hanna
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