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Making America More Competitive Through Tax Reform

December 22, 2008

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 William C. Randolph of the CBO in 2006, have estimated that 70% 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 U.S.  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:

  1. accelerate the expensing of capital investment; and
  2. 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 U.S. also needs to lower its corporate income tax rate.  At 39%, 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%; China, 25%; the UK, 28%; and the Netherlands, 26%.

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 U.S., 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 U.S. 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 United States economy.

Editor’s Note: The following commentary is also featured in Opinion section of the Financial Times.

Comments

    Brett says:

    Fred is right again. The change must be immediate. I don’t see how any the CEO of a global company like FedEx and others can keep the company based in the United States with the corporate tax structure as it is. Stockholders are global citizens. The pressure to relocated to more favorable tax countries from stockholders must be tremendous.

    Tom R. says:

    I think Fred Smith makes alot of good points.
    Untill we are on a even playing feild with the rest of the world,we are truly don’t have a competitive edge that the rest of the world has.

    Sherry Thaxton says:

    With the company’s announcement last week of reducing salaries, etc, it was pointed out that FedEx employees should strive to reduce expenses. One suggestion for this is to eliminate personal mail (including holiday cards, birthday cards, family picutures) being sent by comail. This would include ALL FedEx employees, since surely comail cost is more than USPS stamp.Thank you for reading and considering.

    Carlos Menezes says:

    While not an American citizen or US resident, I work for FedEx in Brazil as a manager, so I am sensitive to this post. The whole world is looking for alternatives to leave the crisis stronger. Financial rules will change again, no doubt about that (conditions that led to this crisis must be addressed). I think the governments must also focus their actions on strong businesses, the ones that creates jobs and wealthy through real and solid products – against the support on financial theories that create money out of money (or out of the impression of money existence). The mentioned country players are surely not aiming on raising corporate taxes or making it harder to invest on assets.

    Ken Matthews says:

    The FAIRTAX is an alternative that will accomplish all of these business goals, and ease the burden on the individual taxpayer. Also it would be a huge transfer of power from government back into the hands of the people where it belongs.

    Mutlu says:

    Insightful and visionary indeed! I hope the Chairman’s approach will help realign the national debate on how to jumpstart job creation.

    Via the accelerated expensing of capital, the allocation of resources by the corporations to the highest return items will be far more efficient and timely, than parts of the fiscal stimulus that may not go through robust planning before execution in the interest of time.

    The corporate tax rate is even more uncompetitive, when compared to free trade zones all over the world, as well as entire territories such as Emirate of Dubai which does not have a corporate tax for firms outside of oil and financial sectors.

    Parker J Arendell says:

    If you’re really interested in a new & improved taxation method, why don’t you join the fairtax.org. I’ll let you logon to their site for the particulars. As a side benefit, the lobbyists in Washington would be out of a job, along with the people at the IRS. When was the last time you had something nice to say about them? Check it out. Then, call and write your representatives in D.C. Have a nice day.

    John Hansen says:

    The tax code brought us down; a re-engineered tax code can take us back to our place in the sun!

    Jana Boyella says:

    Fantastic article. Hope our Government will listen to this.

    Kimla Hill says:

    I am so proud to work for such a wise leader! This article was very enlightening.

    Joyce Gulick says:

    I agree with most of what Mr. Smith says, but I would like to modify further the tax codes.
    I believe that corporations should only be able to deduct salaries/bonus/etc. of executives up to $500k (each) executive per year maximum against earnings. The excesses we have seen of huge salaries, bonus, etc. on wall street & other industries is unfair to main street & to the individual taxpayer. Deducting those salaries against income to reduce the effective tax rate paid is not the American way to go. It is demoralizing to other Americans whose own taxes have to make up for the lost income to the gov’t for necessary services.
    Also – outsourcing jobs to other countries is hurting the US in many ways. We have lost so many jobs as a result of corporations trying to lower their costs. Some form of limitation in the costs that could be deducted from corporate earnings for outsourced work could make sending jobs overseas less competitive & bring these jobs back to the US.
    Corporations need to be able to make money, but Americans also need decent paying jobs. Some compromise is needed to make the process a more transparent & fair process. People cannot buy services without jobs. Corporations cannot sell without buyers.

    michael says:

    Barack Obama, in his book “Audacity of Hope” acknowledges the Keynesian concept that the best way out of a recession is increasing disposable income. In regards to the tax code, this decrease in taxes – preferably both corporate and individual – would correlate with the President Elect’s written thoughts. When we refer to corporate disposable income however, we define it as additional funds to re-invest for operations and future success, which comes in the form of jobs and productivity. Even Ben Bernanke in his textbook “Principles of Economics” discusses the need for a tax policy favorable to corporate capital investment during downwards trends in economic activity.

    Nathan says:

    “..have estimated that 70% of corporate taxes are ultimately borne by the American workforce..”

    How nice of you to pass them along to them. Would you be willing to pay 70% of all of your workforce’s income taxes? Seems like a fair trade to me.

    Matthew Kiely says:

    The U.S. also needs to lower its corporate income tax rate.

    This makes perfect sense.

    I’ve heard Ed Crane from the Cato Institute state something along the lines of “the Law of Demand states that an artificial raise in the price of something (e.g. the higher cost of doing business in the US) will cause less of it to be consumed.” Arguably, less business will be done, capital investment made, jobs available, etc. due to the cost of doing business in the US being made artificially high via punitive corporate taxes.

    Oddly, it seems that the same politicians (from across the spectrum) that call for a high corporate tax rate are the very same that complain when more and more jobs are being shipped overseas.

    Matt says:

    How about this?

    Maybe the big fortune companies band together and just buy the U.S. goverment and run the country any way they want. Oh wait, hasn’t that already been tried.

    Ed Jaro says:

    Once again it seems that the bottom line worker is over looked. Mr. Smith you mention two reductions to tax’s that only apply to business. Granted it is possible that it might create some new jobs. In reality if this was to take place the bottom line worker would be paying more in taxes. I believe it is time to redo the whole tax code to the Fair Tax. If ours was so good the new Iraqi Government would be using it, however they’re not. As the US Government has choosen for them to use the Fair Tax system.

    Pete Peterson says:

    Smart man, but its not hard to realize that you can let corp. keep the money they make instead of printing money to bail them out. These companies have become small goverments in there own right, providing social services the goverment tries to, but does a poor job doing. So if they provide these services that our tax money pays for why should they have to pay so much in tax? If communist China can lower there tax rate(which there about to do) then hopefully capitalist American can too.

    Scott says:

    Eliminate waste. While Mr. Smith’s comments are right on target, this company needs to trim the fat that is often overlooked. We have so many people in this company whos only job is to create paperwork. Our SAL produces a few reems of paper daily in reports that go directly in to the trash. Our company needs to reorganize the priorities and look at every area to eliminate costs. We need to put as much focus on our station utility costs as we do our on-road costs. It all comes out of the same pocket.

    Tim Truax says:

    Hopefully someone in the incoming administration will be as level headed as Mr. Smith is in this article. It’s really quite simple as it is just plain common sense!

    Sireesha Ponnekanti says:

    This is a great article. Let’s hope the US govt will consider this approach soon before the economic downturn gets more worse.

    DERHONDA says:

    I BELIEVE THAT THE PEOPLE OF THE UNITED STATES HAVE ALLOWED THE PROBLEMS TO HAPPEN AND NOW ITS TIME FOR THE BOTTOM LINE AND NO ONE WANTS TO HEAR IT . THE MONEY PROBLEM THAT IS OCCURING NOW IS JUST THE OUTCOME OF ALLOWING THE GOVERMENT TO DO WHAT IT WANTS WHEN IT WANTS. THE GOVERMENT NEEDS A ANSWER TO ALL THE PROBLEMS THAT IS GOING ON AND THAT STARTS WITH THE PEOPLE. LET’S SOLVE IT TOGETHER.

    Tony says:

    Fred Smith makes some very good point’s for his case but it rings hollow when he states , “that his company pays 39 cents of every dollar earned” . I would like to know when was the last time fedex actually paid a tax rate of 39%. The fact is that on average, corporations pay about 10 cents of every dollar earned in taxes. After all of the write offs and loop holes are taken advantage of, most U.S. corporations pay some of the lowest corporate rates in the world. To grant Mr. Smith his tax cut’s would only increase tax rates on the working class , who are already overtaxed and under employed ..

    Ravi says:

    Great Thoughts on Tax Reforms. In this global economy, we not only need to be competitive but also be the leaders. Your article higlights the constraints, the US business leaders are facing compared to their counter parts from the rest of the world as far as tax policy is concerned. It is high time Government listens to the hands on people of the industry and remove the road blocks for them to make America succeed.

    Doug says:

    Unfortunately, sentiments like Tony’s are all too common and I feel are fueled by politicians and an agenda oriented media. The facts tell a different story. According to the FedEx annual report, FedEx Corporation paid $891M in taxes on operating income of $2,075M in FY08. That is an effective rate of 43%.

    Reducing corporate taxes enhances return on investment and job creation as Mr. Smith stated. The resulting economic activity creates more tax revenue. It does not transfer the burden to the “working class.”

    The solution to creating more tax revenue for the government is not to give government a big slice of the pie. It is to make a bigger pie.

    Carrie says:

    The blog post below addresses lower taxes on private firms in Ireland, something McCain was trying to compare during the campaign. Makes some excellent points that could be applied here. I’m cutting + pasting from: this blog:

    ————-
    I just have to make this point from the debate last night. This is important!

    McCain and Palin have mentioned the comparison of US company taxes being so much higher than taxes in Ireland. This is a TERRIFIC example of how you have to understand political economics!! McCain is absolutely right that Ireland has very low taxes for private firms. Why is that?, you might ask. Well, I’ll tell you: it’s because the government of Ireland absorbs the huge social costs of private industry. What does that mean? It means, unemployment is virtually nill because the government reimburses and retrains workers at huge cost to the government, unions have a huge role in government operations, private pay raises are negotiated through the government. The Irish government owns all utilities, transportation infrastructure, parcel delivery, and broadcasting. All education pre-K through college is free. Healthcare is completely government run. THAT is the context in which Ireland is able to offer very low taxation on private business; because they tax their population to pay for social services. Fascinating!

    So in other words, to use John McCain’s example from last night’s debate, why can’t we be like Ireland and have low taxes on private business? We can. But it means we would have to implement a number of so-called “socialist” measures in order to do it. So McCain’s argument, if we take it through, essentially means that we need to become more socialist, way more radically than anyone has ever done in the history of America. Fascinating. I hope you’re following this. It’s a good example of how complex differences get reduced to ridiculous debate points with candidates just counting on the fact that we are all ignorant.

    This is why it is important to know a little bit about economics and politics in addressing the current election.
    ————-

    So while tax reform is needed, we need to be careful what we wish for and look at the big picture from several angles.

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