McLernon: ‘BEPS Action Plan Is Not a Substitute for Good Tax Policy’

WASHINGTON – Nancy McLernon, president and CEO of the Organization for International Investment (OFII), issued the following statement in response to the release of the Organization for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) action plan proposals:

“The BEPS action plan is not a substitute for good tax policy.  For more than a decade, other countries have modernized their tax system, and as a result, become more competitive in attracting global investment and the high-quality jobs it supports.  As a senior U.S. official involved in the BEPS negotiations recently highlighted: ignoring the link between good tax policy and the importance for economic growth and global investment is dangerous.  Making America the best place in the world to invest and create jobs should be the goal of U.S. corporate tax policy, and as U.S. policymakers work toward that objective, it is imperative that they recognize how taxing growth by adding further restrictions on interest expense will lead to fewer U.S. jobs, lower wages and decreased GDP.”  

In 1999, the OECD Average Corporate Tax Rate was 35 percent.  Today, it is 24 percent and now America has the highest rate of all OECD countries.  Over roughly that same period, America’s share of global FDI has shrunk by half, from 37 percent to only 19 percent.  

OFII recently commissioned the economics group within Ernst & Young (EY) to examine the effects that further limitations on interest expense would have on the U.S. economy.  The findings are alarming:

Further limits on interest deductibility (a de facto tax on interest and growth) will decrease GDP, reduce investment in the United States, lead to lower wages and fewer US jobs.

• Reduced FDI: A study by EY shows that further limitations on interest expense would reduce global investment in America by between 2.4 percent and 7.1 percent ($66 billion to $196 billion in lost FDI). 
• Fewer U.S. Jobs: New limitations could also reduce the total employment contribution of insourcing companies by between 500,000 and 1.5 million U.S. jobs.
• Lower Wages: Labor income could fall by as much as $7.9 billion as labor intensity grows in a smaller economy.
• Decreased GDP: In a separate analysis, even when paired with a revenue-neutral reduction in the corporate income tax, further limits to interest expense could decrease GDP by as much as $11.1 billion annually. 

 Manufacturing jobs are at greatest risk

• Manufacturing Is America’s Largest FDI Sector:  More than 33 percent of FDI in the United States goes into the manufacturing sector.  Insourcing manufacturers generate $1.6 trillion in U.S. sales. 
• Less “Made in America:” Capital-intensive industries, including manufacturing, would be the most negatively affected.  The real estate industry could also see a $2.5 billion reduction in economic activity per year.

State-by-State analysis is available at www.ofii.org/ID.