The House Ways and Means Committee held a hearing last week on the international tax competition in 2016. Various distinguished witnesses revealed severe consequences on small businesses and community structures when a corporation moves overseas. Under the present global tax laws, American businesses are not able to compete in the global economy.

The problems with double taxation and corporate inversions are not confined solely to the federal government and large corporations- the ripple effects are seen in our neighborhoods and communities.  International tax reform is being recognized as a bipartisan effort.

Witnesses and committee members confirmed an ongoing consensus on the obligation for tax reform in America. House Ways and Means Committee Chairman Kevin Brady (R-Texas) commented on the need to determine the root cause of the detrimental effects of the US tax code.

Michelle Hanlon, a Professor of Accounting at MIT Sloan School of Management and Itai Grinberg, an Associate Professor of Law at Georgetown University both suggested a complete reform in the US tax code and not simply addressing the issue of corporate loopholes. Strictly focusing on the concern of these loopholes is distracting to the advancement of reform.

Raymond Wiacek, a partner at Jones Day, held that globalization has accelerated the need for tax reform. The urgency of this issue was recognized from both parties. As Wiacek noted, “One of the reasons we’re behind is that we have a noncompetitive tax system.” Currently, our tax code is out of line with the rest of the world and we are losing jobs because of it.

The witnesses recommend 3 major reforms:

  1. Reducing business tax rates: The disparity between the U.S. and its competitors is wide. The combined state/federal U.S. business tax rate is more than 39 percent. Compared to direct competitors like Canada (26.3 percent), the United Kingdom (20 percent), and Ireland (12.5 percent), the U.S. rate is two or three times higher.
  2. Moving to a territorial tax system: The U.S. is one of a few countries that has a worldwide tax system, which means that if you are an American business, the IRS tries to tax everything you earn regardless of where you earn it. One of the main reasons for inversions is that the U.S. double taxes income earned abroad. Most other countries have a territorial tax system, meaning they tax money earned in their country but welcome the return of money earned abroad tax-free.
  3. Moving to a consumption tax base: Ideally, income should be taxed at the point of consumption thus eliminating most tax exclusions, adjustments, deductions, and credits. While creating an even and efficient tax code that does not distort the final cost of product, the consumption tax is the most economically efficient base that promotes stronger growth.