America’s tax system needs an overhaul. It is too complex. Many provisions are unreliably temporary. Even rules that work as intended have been branded as loopholes.
And the system is clearly uncompetitive, as shown by both our outdated worldwide system, which double-taxes American companies, and our corporate rate, now the highest in the developed world.
The current administration deserves credit for releasing its recent tax reform document, “The President’s Framework for Business Tax Reform,” which recognizes the macroeconomic potential of lowering corporate rates.
Unfortunately, the president’s proposals did not acknowledge how our worldwide tax system — imposing U.S. taxes on top of foreign taxes on sales made somewhere else — disadvantages American companies and undermines a more robust economic recovery.
Consider, for example, Otis Elevator Co., one of United Technologies’ flagship businesses. The elevator industry is a case study in the realities of globalization and the negative impacts of an unlevel tax playing field. In 2011, 15,000 elevators were sold in the United States. By contrast, 380,000 were sold in China.
To compete for business in the large Chinese market, Otis must be physically present there. Proximity to building sites boosts sales, helps control transportation costs and enables just-in-time delivery. A local presence is also crucial in winning maintenance contracts — you can’t service an elevator in Hangzhou from Hartford.
In addition, although elevators have been around for more than 150 years, innovation remains essential. Otis continues to engineer new technology, such as a regenerative drive that returns energy to the grid as elevators descend. The resulting advanced engineering activity and intellectual property reside largely in the U.S. Keeping that high-value work here is highly dependent on Otis’ success around the world.
The link between Otis’ global operations and its success as an American enterprise illustrates why U.S. tax reform must address international competitiveness. In a market where over 600,000 elevator units are sold every year, Otis is the only U.S.-based player left.
Our competitors hail from countries that have adopted territorial tax systems and lowered their rates. The inequity that companies such as Otis are taxed twice, while their competitors are taxed only at the point of sale, could be remedied if Washington adopted a territorial tax system.
This much needed reform has been advocated by the Simpson-Bowles Commission, the President’s Export Council, the chairman of the Committee on Ways and Means, and other prominent congressional and business leaders. Moreover, America is alone among G-8 nations in maintaining its long-arm taxation of homegrown companies.
The U.K. recently moved to a territorial system to reduce the incentive for British firms to move out of the country. Japan switched to eliminate barriers to bringing foreign earnings home. Germany has had a territorial system for years and remains one of the world’s top exporters.
Adopting a territorial system would allow U.S. firms across the industrial spectrum to return earnings that are currently trapped abroad to this country, enabling further investments in research and innovative new technologies.
It would also remove impediments to setting up U.S. headquarters and eliminate the current law defect that advantages foreign companies in bidding on and acquiring American ones.
After nearly 80 years in business, United Technologies knows that no company can succeed at home if it fails abroad. Modernizing our tax laws, which can be done on a revenue-neutral basis, is crucial to that success. Moving to a territorial tax system would be a huge step toward future wins.
• Hayes is the senior vice president and chief financial officer of United Technologies Corp.
