2012 US Tax Reform for Jobs

Letter sent to US President Obama, US Senator Durbin, all US Senators on the Finance Committee, and all US Senators on the Super Committee

Dear Mr President and Senators;

The economic fix to the US economy requires a change to the tax code to stimulate the economy and not raise or lower tax rates on a broken down tax system. Our present tax system promotes the outsourcing of labor and manufacturing activities outside the US. We need a tax system that will help us compete in a global economy.

Lowering or raising tax rates on businesses and rich individuals will not stimulate the economy in and of itself. Still if we significantly lower tax rates on large corporations these businesses will continue to export jobs to cheap foreign labor markets and import foreign goods from such markets.

The key to create jobs in the US economy is to keep the corporate tax rates at 35% but allow a compensation tax credit (based on U.S. employee wages and benefits) to effectively reduce corporate tax rates to single digit rates for corporations/businesses that pay decent compensation packages to its employees. IRS/Treasury has the necessary data to compile and arrive at the appropriate compensation ranges and tax credit rates needed to accomplish this task. Most likely the compensation tax credit to corporations will be a bell shape curve with lower compensation package per employee receiving a smaller tax credit rate while decent compensation packages per employee will receive the maximum tax credit rate. The compensation tax credit should start at a low credit rate at $23,000 compensation and end again at a low credit rate ending at $152,000 compensation. The maximum compensation tax credit rate will be in the range of $65,000 through $110,000 in compensation. This compensation tax credit should only be offered to subchapter C corporations (regular corporations) and not be allowed to any flow-thru entities like S-Corps, LLC's , and partnership. The administration of this tax change would be easier for the US Government to administer through regular corporations. Flow-thru entities of small business owners would have the opportunity to change their legal status to a subchapter C corporation to take advantage of the compensation tax credit.

Next, we need to change how US taxpayers are taxed on their foreign holdings. The US has a tax system that supposedly taxes all earnings on a world-wide basis but in reality it does not. The tax law needs to be changed to clearly tax all foreign sourced income earned world-wide by any foreign entity owned by a US entity. Again, the only two tax credits remaining in the new tax law change will be foreign tax credits (FTC) paid/accrued on all foreign source income earned world-wide and the compensation tax credit (based on US employee wages and benefits). Thus, corporations must adequately include all foreign source income in taxable income, be taxed at 35% on all world-wide taxable income then receive the foreign tax credit and compensation tax credit to offset its US tax liability. Again, corporations that pay decent compensation packages to US employee will pay an effective tax at minimal rates in the single digits.

The arguments made by many so-called experts that the US should have a territorial taxation system does not solve the problem of US jobs being exported to cheap foreign labor markets. Offering low blanket tax rates to any business does not equate to the creation of new decent paying jobs in the US. Corporations still wanting to maintain a competitive edge will always seek low cost labor markets or cheap imports regardless of their blanket tax rate. That is why we must incorporate the compensation tax credit into our US tax system to reduce the effective tax rate of corporations that create decent paying jobs. Low blanket tax rate cuts do not necessitate job creation in and of itself. For example, when the US Government allowed US corporations to repatriate foreign earnings (not previously taxed) in tax year 2004 at a low tax rate of 5.25%, the repatriated foreign earnings brought back to the US did not increase any US employment. Instead, many of these funds were used to buy outstanding corporate stock to fund executive compensation. The concept of a blanket tax rate cut will not stimulate the economy.

We need to significantly lower tax rates on corporations paying decent compensation through the compensation tax credit to enable us to compete with nations like China and India. China exploits its own people through a cheap labor work force but at the same time the Chinese Government taxes their corporations at a 25% tax rate. Taxes have to be reduced on US corporations so that these tax savings through the compensation tax credit can be used to hire US employees at a decent living wage. To sustain the payment of decent compensation to US workers, we must reduce the effective tax rate of US corporations to single digits in order to compete with China and other emerging nations. While jobs are created in the US and disposable income increases, our US economy will rebound and grow.

The US Government should encourage US Corporations to maintain foreign business presence outside the US but not with the primary purposes shifting US jobs to cheap foreign labor markets. The US Government will enforce a taxation system in which all world-wide income is subject to US taxation without any loop-holes; but, at the same time the US Government will reward an offset against foreign source income only to US corporations that pay decent compensation packages to its US employees. For example, in year 2012 a corporation incurs a $35,000,000 compensation base (wage and benefits) that covers compensation paid on all US employees between the $50,000 and $125,000 range per employee. In tax year 2012, the US Corporation will offset its foreign source income by the $35,000,000 qualified US Compensation Base and the $35,000,000 of foreign source income is not subject to US taxation. This exemption of foreign source income based on the qualified US Compensation Base is an annual computation which can never reduce foreign source income below zero for the year in question. Again, we reward corporations who sustain our economy through the payment of decent wages and benefits to its US employees.

Finally, we need to address the collection of Social Security and Medicare taxes. US employers pay a 7.65% tax rate on each employee. This is an added cost burden included on our US goods and services that have to compete against foreign goods and services that do not have this cost burden. We are putting ourselves at a competitive disadvantage with many foreign businesses. The US Government should eliminate the collection of payroll taxes to fund Medicare and Social Security and subsidize Social Security and Medicare through the collection of a 15% Value Added Tax (VAT) on goods and services. That way foreign imports will be equally taxed at a 15% VAT tax just like US goods and services. Likewise our foreign exports of US goods will not have this extra cost burden and will enable us to compete in the world-wide market.

The Bush tax cuts on individuals should remain unchanged except for capital gains and dividends tax rates. Capital gains and dividends should be taxed at regular tax rates for individuals. The reduced tax rates for capital gains and dividends under the Bush Tax Cuts did not stimulate our economy.

Tax incentives should be offered to individuals who invest in US corporations qualifying for the compensation tax credit. Corporations that incur employee compensation (US wages and benefits) between $50,000 to $125,000 per employee may offer equity instruments directly to individual investors that cover the corporation's compensation base in which the individual investors receive an investment tax credit of 15% against regular income tax. For example, in year 2012 a corporation incurs a $35,000,000 compensation base that covers compensation paid on all US employees between the $50,000 and $125,000 range per employee. The US corporation may offer up to $35,000,000 in equity instruments directly to individual investors during tax year 2012 or anytime on or before 3/15/2013 for a 15% investment tax credit on an individual's 2012 income tax return. Cash directly received by the US Corporation from the issuance of these qualified equities could be used by the business to purchase property, plant, equipment, and raw materials to enable its growth with low cost capital.

Creating better paying jobs and being globally competitive will increase tax revenues to both the Federal and state governments.

The US Government needs to institute a true world-wide taxation of foreign source income. The current FTC limitation rules under the new tax law proposals would have to be changed in computing US tax for corporations.

US Source Taxable Income
x 35% tax rate
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Tax before Compensation Credit
(less) Compensation Tax Credit
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= US Tax on US Source Income
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Foreign Source Income
(less) US Compensation Base
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Foreign Source Taxable Income
x 35 % tax rate
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Tax before (FTC)
(less) Foreign Tax Credit (FTC)
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= US Tax on Foreign Source Income
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