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Tax reform: Four key fixes

As Paul Ryan settles in to his role as Speaker of the U.S. House of Representatives, his experience as chair of the House Ways and Means Committee will be beneficial in overseeing reform for the U.S. tax code. Our leaders have the opportunity for meaningful reform in a number of areas to create a tax system that aids and encourages U.S. competitiveness.

A PPG quality assurance technician examines a paint formula at one of PPG’s coatings manufacturing facilities.
Source: PPG Industries
A PPG quality assurance technician examines a paint formula at one of PPG’s coatings manufacturing facilities.

First, we can eliminate loopholes by simplifying the tax code. This creates a more equitable, balanced system and establishes a level playing field that fosters a fair and competitive environment for business.

Next, we can promote innovation among U.S. companies by making R&D tax credits permanent. The research and development tax credit expired December 31, 2009, for the 14th time since it was created in 1981. While there is broad bipartisan support for the R&D tax credit, this important policy continues to be used as a bargaining chip. Nearly 18,000 companies of all sizes use the credit, and some 70 percent of credit dollars are used for salaries of workers engaged in R&D, encouraging the creation of more high-paying U.S. jobs.

A strengthened and permanent R&D incentive would assure U.S. companies that the credit will be available during the life of R&D projects. Without a permanent R&D tax credit, fiscal planning around large, multi-year investments in R&D projects can be a guessing game. Let's come together to create a strong, permanent and competitive R&D incentive to help bolster U.S. innovation and help manufacturers succeed.

In addition, we have the opportunity to address our national tax system to make it more competitive, encourage innovation and spur investment, job creation and economic growth. This begins with a lower corporate tax rate. The U.S. has the highest corporate tax rate among developed countries. In recent years, nearly 60 countries have cut their corporate taxes to encourage economic growth. By standing still, the U.S. has fallen behind. Reducing the corporate tax rate to 25 percent or lower would make the U.S. tax system more competitive. If we are serious about creating a climate for economic growth, now is the time to adopt tax policies that empower U.S.companies to become more competitive and make our country a more attractive place to invest.

Finally, reform in our current international tax system can do more to promote international competitiveness. Currently, U.S. businesses are expected to pay the same amount of tax on income that they earn abroad, when repatriated, as they would if they earned that income in the U.S. These current tax laws make it difficult for U.S. companies with worldwide operations to thrive and compete in the global marketplace. If U.S. companies cannot compete abroad, where 95 percent of the world's consumers are located, the U.S. economy suffers from the loss of both foreign markets and domestic jobs that support foreign operations.

There is widespread agreement that the current system destroys jobs and suppresses wages for U.S. workers. We have an opportunity to use this common ground to make the U.S. more competitive with the introduction of territorial taxation, a system used by nearly every other major industrialized country. A territorial system taxes businesses on only income earned within a country's borders. It applies to all businesses that operate within a country's boundaries, whether that business is headquartered in that country or another.

To make U.S. businesses more competitive, manufacturers such as PPG support simplifying the tax code, lowering corporate tax rates, establishing a permanent R&D incentive and adopting a competitive territorial tax system. We must address our tax system to make it more competitive, encourage innovation and spur investment, job creation and economic growth. The success of manufacturing and the economy in the U.S. depends on experienced leaders like Paul Ryan taking action.

Commentary by Frank Sklarsky, the executive vice president and chief financial officer of PPG Industries.