11.10

By George F McClure

Taxes are in the news, with the presidential panel on debt reduction expected to issue its report in less than a month.  Some proposals are described here, with polls where you, the reader, can weigh in.

R&D Tax Credit

The Research and Experimentation tax credit has been extended numerous times, but advocates (including IEEE-USA) argue that a permanent credit would be more valuable because it would permit long-range planning for R&D.  When it was first enacted in 1981,  the U.S. R&D tax credit was the most generous of any nation, but it lapsed and was renewed 14 times thereafter, becoming less generous.  The credit is now only seven cents for each dollar spent in R&D, an amount exceeded by 16 other nations.

It was argued that the tax revenue loss from a permanent extension was unaffordable in the budget, accounting for the temporary extensions.  But even so, in the U.S. R&D for process improvements (manufacturing technology) is not eligible for the credit.  Since more than half of the utility patents issued are for manufacturing technology, this could be hampering domestic innovation in the manufacturing sector.  Of course, manufacturing technology improvements are linked to locations where production is accomplished.  Motivations that shift manufacturing off-shore do not aid innovation advances in the U.S. for process improvements.

Corporate tax reduction

A topic receiving a lot of attention now is the corporate income tax rate for U.S. profits.  The posted rate is 35 percent, but there are various deductions (such as depreciation for capital investments) that reduce the actual rate.  Google is an example of a corporation that has used legal means to reduce its tax bite.  It paid $1.5 billion in U.S. taxes in 2009, but cut its taxes on overseas profits by $3.1 billion over the past three years — to a rate of 2.4 percent, according to the Washington Post.

Profits kept offshore are not subject to the U.S. corporate tax bite, unless they are brought back home.  In that case, the U.S. tax due is calculated after allowing credit for offshore taxes already paid.  This causes many corporations to hold their foreign profits offshore and not repatriate them to the United States where they could aid domestic investment, pay down debt, and create more jobs at home.  The CEO of Cisco Systems has made a persuasive case for cutting the tax on repatriated profits.  A trillion dollars is waiting to be repatriated if the tax policy is right, John Chambers argues. Many other countries levy a tax charge of zero to two percent to return foreign earnings to their home country.  Low corporate bond rates encourage borrowing rather than paying the tax (which may be 40 percent when federal and state taxes are counted) on foreign profits to return them to the U.S.  Chambers argues that a low tax rate on repatriated funds, say, 5 percent, could unleash a large stimulus here at home and raise $50 billion in tax revenue that would not otherwise be realized.  The $50 billion could be used for a refundable tax credit to put 2 million people to work in newly created jobs.

There is a precedent.  A one-year reduction in the tax rate on repatriated funds (to 5.25 percent) brought hundreds of billions of dollars back home in 2004.  But even though the 2004 law specifically prohibited the use of repatriated earnings for share repurchases, dividend payouts, and executive compensation, a careful study by professors at the University of Pennsylvania Wharton School of Business and the University of Texas concluded that firms did, in fact, use a significant share of repatriated earnings for share repurchases. Others may claim that the repurchases were not done with repatriated funds, but with domestic funds.

During the last presidential election one of the candidates urged a reduction in the corporate tax rate to 25 percent.  Another proposal would peg it at 24 percent.  The posted 35 percent rate is among the world’s highest.

The presidential debt commission, due to report on 1 December, is expected to recommend a reduction in the corporate tax rate, provided some other tax breaks are reduced.  One of those would be the R&D tax credit.

George F. McClure is Technology Policy editor for IEEE-USA Today’s Engineer and the IEEE Vehicular Technology Society's representative to IEEE-USA's Committee on Transportation and Aerospace policy.

Comments may be submitted to todaysengineer@ieee.org.