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April 17. 2014

U.S. Tax Code Complexity Hurts American Businesses, Workers, and Taxpayers

Economists, politicians and citizens everywhere agree that the U.S. tax code is overly complex. For many Americans, this fact remains a distant abstraction for most of the year. Unfortunately, the unpleasant, cumbersome reality is unavoidable on at least one day every year: Tax Day.

American businesses deal with this mess every day. Our tax code causes problems due to frequent revisions and changes, the problems inherent with our current system of taxation, and the costs of compliance imposed on American taxpayers and businesses as a result.

American companies pay billions of dollars each year just to make sure they are complying with our complex, outdated tax code. In 2005, the Tax Foundation estimated the cost of compliance at $148 billion for American companies. Setting a corporate tax rate of 25%, while also getting rid of tax breaks and preferences that advantage some industries at the expense of others, would make the tax system simpler, fairer, and free up funds that can be used for jobs and economic development.

Since the last significant round of tax reform and simplification in 1986, numerous revisions have been made to the tax code – often piecemeal patches to an antiquated tax system. A 2012 report from the Taxpayer Advocate’s office of the Internal Revenue Service found that 4,680 changes had been made since 2001 alone, and the total tax code was now more than 4 million words.

And yet, even with all the changes over the years to our tax code, two very basic facts have remained:

  • The United States has the highest corporate income tax rate in the developed world.
  • Our “worldwide” system of taxation is outdated and places American companies at a disadvantage in the race to meet the demands of a global marketplace.

The U.S. tax code – regardless of its degree of complexity – should first and foremost encourage economic growth and ensure competitiveness of American businesses. Unfortunately, our current tax system has the worst of both worlds.

But the high corporate income tax rate’s harmful effects extend far beyond corporate headquarters. U.S. multinationals employed nearly 23 million American workers in 2011. Factoring in supply chains and other factors, these companies support more than 63 million American jobs. And last November, the Joint Committee on Taxation quantified just how much these American workers are impacted by the corporate income tax rate: an estimated 25% of the long-term corporate tax burden falls on workers, not capital owners.

Pursuing simplification and reform would yield important benefits to the economy, U.S.-based businesses and the American people. A Joint Committee on Taxation analysis found that tax reform would create 1.8 million new jobs, and a Business Roundtable report highlighted that tax reform would:

  • Boost after-tax wages for American workers by 2.3 percent two years after enactment, by 3.8 percent after 10 years, and by 6.1 percent over the long term;
  • Increase U.S. annual GDP by 0.9 percent two years after enactment, by 2.2 percent after 10 years, and by 3.1 percent over the long term; and
  • Expand U.S. annual domestic investment by 1.8 percent two years after enactment, by 6.5 percent after 10 years, and by 6.8 percent over the long term.

At the same time, setting a corporate tax rate of 25% would help enhance the competitiveness of American companies. Instead, with the highest corporate income tax rate in the developed world, the U.S. is driving these companies away. As a result, the U.S. has become an unattractive location for corporate headquarters. According to an op-ed published in the Wall Street Journal last year, the U.S. was home to 218 of the world’s 500 largest corporations in 1986. Today that number has fallen to 137.

It’s time to act. A modern, competitive tax code would boost the economy, create a level playing field for American businesses and create jobs for American workers. When you face the complexity and confusion of our tax code this week, try instead to think of the improvements we can make in the years ahead.