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How Tax Reform Will Grow Our Economy and Create Jobs: a Testimony to the U.S. House of Representatives

Several majors could make a play for Permian producer Endeavor Energy

IEA warns of oil supply lagging demand without significant investment

Permian producers prepared for dip in oil prices to last into 2019

Stocks Rocked the House Post Midterm Elections

How Tax Reform Will Grow Our Economy and Create Jobs: a Testimony to the U.S. House of Representatives

The following is a testimony given by Douglas L. Peterson, President and CEO of S&P Global, at the Committee on Ways and Means, the chief tax-writing committee of the United States House of Representatives, on Thursday, May 18, 2017.

Chairman Brady and Ranking Member Neal, thank you for inviting me to speak today. And thank you to the entire Committee for your efforts to modernize the U.S. tax code.

I am grateful for the opportunity to share my perspective on how tax reform is essential for U.S. companies to better compete in the global marketplace.

S&P Global is the Worldwide Provider of Essential Intelligence

S&P Global is a leading provider of ratings, benchmarks, analytics and data to the capital and commodities markets worldwide.

S&P Global’s insights and commitment to transparency, integrity, and superior analytics have been at the forefront of U.S. economic growth since the company’s founding over 150 years ago. Beginning with the expansion of our nation’s railroad system, to the rise of the world’s most liquid and resilient capital markets, to the growth of digital information and technology, S&P Global’s essential intelligence has remained independent and has guided important decisions throughout U.S. history.

Two of our flagship products, the S&P 500® and the Dow Jones Industrial Average®, are widely accepted as the leading measures of U.S. equity market performance. Our research, products, and insights offer American investors, their families, coworkers, and friends the critical information needed to make informed financial decisions.

In addition to employing thousands of Americans across our great country, we work extensively with businesses of all sizes to help them invest and grow, as well as state and local governments, to help facilitate investment in schools, roads, bridges, and other public works. There is bipartisan agreement about the challenges facing our country’s aging infrastructure, and we hope to continue to bring our data, in-depth analytics, and unique ideas to the table to work with Congress to address those issues.

U.S. Tax System is Uncompetitive Globally

Currently, the U.S. has the highest statutory corporate tax rate among the 35 countries in the OECD. Importantly, other countries are attempting to lure our businesses—and their tax revenues—abroad. A recent Congressional Budget Office (CBO) analysis demonstrates not only the high statutory corporate rate in the U.S., but also the changes that have been made to tax rates in other G20 countries while the U.S. has stayed static. This study, which encompasses the 2003-2012 timeframe, shows how almost every country around the world has been incentivizing corporate investment through lower taxes. For example, during this timeframe, Canada dropped from 36 to 26% and China from 33 to 25%. The United Kingdom will have a 17% corporate tax rate by 2020.


Source: CBO International Comparisons of Corporate Income Tax Rates, March 2017

According to our research, the other countries where our competitors domicile their business and intellectual property have significantly lower corporate tax rates compared to the U.S., as seen in the chart below.

Figure 2

  United States Ireland U.K. Singapore
Corporate Tax Rate 35% 12.5% 19% (17% in 2020) 17%
Local Income Taxes Yes No No No
VAT/GST Sales/Use Taxes 23% 20% 7%

S&P Global’s Tax Rate is Twice That of its International Competitors

S&P Global is a U.S.-headquartered company, but, like so many others, we compete at the international level. While we have grown significantly since our beginnings, we have maintained ownership of most of our intellectual property in the U.S. We therefore have a much higher effective tax rate than our international competitors do. In fact, throughout our history, we have consistently paid an effective rate of over 30%, while many of our competitors pay in the low teens. As an example, we paid an effective tax rate of 30.1% in 2016 and $683 million in taxes. Because our greatest asset is our people, not machines or real estate, we are unable to avail ourselves of deductions and write-offs in a tax code that was written for a different time and a very different economy.


In 2016, even though 60% of our revenues were domestic, our U.S. tax base was 70% of our income because of our U.S.-based intellectual property. Over the last five years, S&P Global has paid $1.8 billion in taxes in the U.S.


At this unique moment in time, our country has the opportunity to put aside political differences and enact tax reform that not only brings the tax code into the 21st Century, but also ensures that America remains the best place in the world to do business.

It is Time to Level the Playing Field

The U.S. federal tax code was last updated over 30 years ago, in 1986. Its structure, however, is rooted in the post-World War II era. We have a markedly different economy today. For example, who could have foreseen the ubiquitous nature of technology in the way we conduct business today? Intellectual property is more important than ever to our global economy. And the pace of technological change is only accelerating.

Figure 7
Evolution of U.S. Economic Activity

U.S. GDP (Value Added by Industry)      
  1950 1986 2016
Private Service-providing 47.9% 60.0% 69.2%
Manufacturing 26.8% 18.1% 11.7%
Other 12.0% 14.3% 12.9%
Agriculture & Related 6.6% 1.6% 0.9%
Construction 4.3% 4.3% 4.2%
Energy 2.6% 1.5% 1.4%

Note: Figures may not add to 100% due to rounding


Figure 9
Evolution of U.S. Employment

U.S. Labor Force (% of total)      
  1950 1986 2016
Private Service-providing 41.6% 57.8% 69.7%
Manufacturing 26.7% 17.1% 8.4%
Other 11.6% 16.4% 15.1%
Agriculture & Related 13.6% 3.0% 1.6%
Construction 4.5% 4.8% 4.5%
Energy 1.7% 0.8% 0.4%

Note: Figures may not add to 100% due to rounding


We must make adjustments that reflect the growth and development of our dynamic economy in order to keep up with the quickly evolving competitive global market. Three primary elements are critical to help ensure that U.S. companies can better compete in the global marketplace. These include:

Lower Rates

A lower corporate income tax rate must be part of any tax reform plan. Our country’s high statutory rate hinders the ability of U.S. companies to successfully compete on the global stage. A lower tax rate would not only help curb the exit of U.S. companies from our great country but would also create a powerful incentive for others to move here.

Competitive International Tax System

A tax reform effort must also result in a level playing field for American companies. Currently, foreign companies established in a country with a territorial tax system that sell goods in the U.S. pay little-to-no corporate tax when the profits return to the home country. In contrast, U.S. businesses that sell goods and services to foreign customers are taxed when their profits are returned to be reinvested in the U.S. This discourages reinvestment of profits generated abroad into the United States, a dynamic that simply doesn’t exist for the international competitors of U.S. companies.

This unfair playing field is tilted further against U.S. companies by border-adjusted taxes such as Value Added Taxes (VAT) that have been enacted in more than 130 countries around the world. Foreign companies can sell goods and services from a VAT country into the U.S. without paying VAT in the source country and without any border-adjusted tax upon import to the U.S. In contrast, goods and services produced in the U.S. and sold into a VAT country bear a tax upon importation at rates that can reach 20%.

This does not benefit American businesses, the communities in which they operate, their employees, or their families.

Modernized Tax Code for America’s Evolved Economy

Since the tax code was last reformed, the American economy has changed dramatically in terms of the products it makes, the markets it sells into, and the skills it requires. The emergence of technology, the growth of intellectual property, and the globalization of markets are all new features of our economy.

The tax code, though, has not evolved with the economy. The result is a highly unfair system that undermines competitiveness. The tax inequities that now exist between companies, and the inequities that advantage foreign competitors over their American counterparts can be traced to an antiquated code.

It’s time for a fresh start to American tax policy—one that levels the playing field for all American firms—and ensures that no firm (“old” economy or “new” economy, manufacturing or service) is disadvantaged when competing.

Restoring Growth and Competitiveness to the U.S. Economy

In a recent survey by the Business Roundtable, 71% of CEOs who responded identified tax reform as the best way to accelerate U.S. economic growth. This overwhelming response demonstrates the potential and the importance of reforming our tax code.


The U.S. remains a “tax outlier.” Our tax system is antiquated, unfair, and hinders our ability to compete on a global scale. It is time for a change. The current system is stifling our economic growth. We are losing ground at a time when we should be leading. It is incumbent on us to seize this moment and enact substantial changes that will eliminate concerns for businesses about growing, investing and innovating in the U.S.

I hope this Congress will seize this moment.

Thank you for the opportunity to provide this statement at such an important time. I welcome any questions you might have.

Several majors could make a play for Permian producer Endeavor Energy

Oil majors Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell PLC and ConocoPhillips are all considering making first-round bids for Texas-based oil producer Endeavor Energy Resources LP.

Including debt, Endeavor, which holds more than 300,000 acres in the prolific Permian Basin, could be valued at $12 billion to $15 billion. Core acres are located in Martin, Midland, Upton, Glasscock, Reagan and Howard counties. The company's net production in the second quarter was 64,000 barrels of oil equivalent per day, 75% of which was oil.

Many of the majors have highlighted their renewed interest in the U.S. shale plays. Having announced plans earlier this year to triple its Permian oil production to 600,000 barrels per day by 2025, Exxon is viewed by many as the most logical would-be buyer of Endeavor. Back in 2014, Exxon inked a seven-year deal with the producer to expand its presence in the basin.

Exxon's third-quarter shale oil output from the Permian was up 57% on the year due to the ramp-up to the current 38 rigs in the Midland and Delaware basins. The company's third-quarter Permian production increased 170,000 boe/d, or 11%, on the quarter.

While Chevron could be a contender, the company already has a sizeable position in the Permian, analysts said. "Chevron is another possibility although we think its existing position of 1.7 [million] acres (0.5 million Midland and 1.2 million Delaware) is likely adequate, with the focus likely to be more on acreage swaps and trades to core up its position," RBC analyst Biraj Borkhataria wrote in a Nov. 13 note.

Analysts said ConocoPhillips and Shell are less likely to emerge as bidders.

"Despite the company's positive disposition to the play, we would not expect Shell to bid for such a large package given the company has been clear that inorganic activity is included within its $25 [billion] to $30 [billion] capex framework per annum, meaning limited headroom to execute such a large deal," Borkhataria said.

Should a sale occur, it would follow a rash of Permian-based transactions, including Concho Resources Inc.'s purchase of RSP Permian for $8 billion and Diamondback Energy Inc.'s purchase of Energen Corp. for $9.2 billion. Additionally, on Oct. 31, BP PLC closed on its $10.5 billion acquisition of BHP Billiton Group's U.S. shale oil and natural gas assets.

In emailed requests for additional details on a sale, officials from Endeavor, Exxon, Shell and ConocoPhillips declined to comment. An inquiry to Chevron was not immediately returned.

Endeavor, which is family owned, agreed to explore a sale after receiving inquiries from prospective bidders, although the family reportedly would prefer an IPO next year so it could retain control. JP Morgan Chase & Co. and Goldman Sachs Group Inc. were reportedly selected to arrange the possible transaction.

IEA warns of oil supply lagging demand without significant investment

The International Energy Agency warned in its World Energy Outlook 2018, released Nov. 13, that without sufficient oil production investment, the world faces a possible oil supply gap during the early 2020s.

"Oil and natural gas will be part of the energy system for decades to come — even under ambitious efforts to reduce greenhouse gas emissions in line with the Paris Agreement," the report said.

Under existing and planned policies included in the report's new policies scenario, trucking and aviation demand will drive global oil consumption to 102.4 million barrels per day by 2025. Meanwhile, the IEA projects currently producing oil fields will supply just 68.0 MMbbl/d.

"The level of conventional crude oil resources approved for development in recent years … is only half of the level needed to meet demand growth in the [new policies scenario]," the report said.

"If these approvals do not pick up sharply from today's levels, U.S. tight oil production would need to triple from today's level to over 15 [million barrels per day] by 2025 to satisfy demand," the report said. "With a sufficiently large resource base, this could be possible. But it would require levels of capital investment that would far surpass the previous peaks in 2014."

Among trends to 2040, the IEA outlined a "major shift in the geography of oil demand."

According to the report, developing economies will see oil demand grow by 18 MMbbl/d from 2017 to 2040, offsetting a demand decline of 10 MMbbl/d in developing economies.

The IEA projects global oil demand from trucking will grow by 3.9 MMbbl/d, while global oil demand from petrochemicals grows by 4.8 MMbbl/d.

At the same time, the IEA expects oil use in cars will peak in the mid-2020s. It projects approximately 300 million cars on the road by 2040 will avoid 3.3 MMbbl/d of oil demand that year, while efficiency improvements in nonelectric cars will avoid more than 9 MMbbl/d of oil demand in 2040.

The IEA projects automotive demand for oil will decline by 5 MMbbl/d from 2017 to 2040 in advanced economies, offsetting demand growth of 5.4 MMbbl/d in developing economies.

Permian producers prepared for dip in oil prices to last into 2019

Mindful of the lessons learned during the 2014-2016 oil and gas price collapse, large independent producers in the Permian Basin are shielded from the current U.S. oil price slide, thanks to conservative budgeting, new access to Brent crude pricing at the Houston Ship Channel and greater efficiency.

The price of West Texas Intermediate crude oil bounced back above $60 per barrel on the morning of Nov. 12, a slight improvement over the end of the previous week but still well below the $76.40/bbl reached in early October. If prices remain near $60/bbl, that will be more than enough for most producers to see healthy returns, as many have budgeted for prices at $50/bbl or below. Even though prices spiked more than $20/bbl above anticipated levels for several months, Permian producers largely made only slight increases to budgets as they looked to the long term.

"The industry has been conservative in oil price assumptions," Williams Capital Group LP analyst Gabriele Sorbara said. "I would say a majority of 2018/2019 budgets are contemplated on $50-$60/bbl WTI."

EOG Resources Inc., one of the largest producers in the region, assembled a capital budget for 2018 assuming oil prices at $40/bbl and gas prices at $2.50/Mcf, and the company intends to take a similar approach in 2019.

"We're not going to increase capital at the expense of efficiencies and returns. We will develop our assets and spend capital at a pace that will optimize our learning curve and allow sustainable improvement to our well productivity and cost structure," EOG CEO William Thomas said. "Any production growth is strictly the result of disciplined capital allocation to high-return assets. … We are continuously resetting the company to deliver strong returns, even in a low to moderate oil price environment."

When capital budgets for 2018 were assembled, most Permian producers assumed that WTI would hover around the $50/bbl level for much of the year. Even though they recognized far more revenue during the second and third quarters than initially anticipated, they seem content to stay the course at similar levels for 2019.

"What matters for companies is the long-term expectation," said Raymond James & Associates analyst Pavel Molchanov, who anticipates that most companies will continue to build budgets based on prices near $50/bbl. "The futures pricing for 2019 is pretty close to what it was a year ago."

Unlike the situation facing Permian producers during much of the price collapse, many independents have a new advantage, in spite of pipeline constraints: exports to Europe and Asia through the Houston Ship Channel. The exposure to offshore markets and Brent crude prices has allowed them to increase their revenues, as Brent crude was trading at more than $71/bbl on Nov. 12.

Pioneer Natural Resources Co. CEO Timothy Dove said during the third-quarter earnings call that his company would stick to its $3.4 billion budget for 2018 and is likely to take a similar course in 2019. But Dove said Pioneer is now able to avoid the consequences of a WTI price drop due to large amounts of its Permian crude being exported.

"We are now essentially a Brent-priced company if you talk about our oil sales," he said.

Another lesson learned from the price collapse was a continued push for efficiency, with producers using new technologies and methods to cut costs while increasing production. During Anadarko Petroleum Corp.'s third-quarter earnings call, executives said the company's more efficient operations would allow it to recognize "double-digit" production growth while maintaining a budget anticipating $50/bbl prices.

Apache Corp., which is increasing its Permian operations with the development of the Alpine High play, said it would operate in 2019 with a capital budget of $3 billion, lower than in 2018. "If changes in expected cash flow dictate, we have the flexibility to reduce our activity levels accordingly," CEO John Christmann said. The move by Apache and other producers to follow long-term price expectations and not become overly exuberant over higher prices earlier this year may have allowed companies to hold steady heading into 2019.

"Capital spending should be either stable from what it is this year or modestly higher, but no one should expect cuts in capital spending from recent levels because this year's capital programs always lagged behind the uplift we saw in prices we saw in the summer months," Molchanov said.

Stocks Rocked the House Post Midterm Elections

After the S&P 500 logged its 9th worst Oct. on record, losing 6.9%, it has bounced back 2.6% month-to-date through Nov. 9, 2018. Though the monthly returns for the eight Novembers following the historically bad Octobers were only positive twice – in 1978 (President Jimmy Carter midterm year) and 1933 – the fact there was a midterm election this year may help the chance of a solid rally if history repeats itself. Historically, the S&P 500 has been positive in most periods after the midterm elections.

In the months of Nov. and Dec. during historical midterm election years, the S&P 500 gained 14 of 22 times in Nov. and in 15 of 22 times in Dec. with a combined 2-month gain in 17 of the 22 midterm election year-ends. In percentage terms, the S&P 500 gained in 64% of midterm election Nov. months and 68% of the following month that when combined into a 2-month return resulted in gains 77% of the time. Also, the magnitude of the average gains in the 2-month period was 6.1%, more than the magnitude of the average loss of 4.1%.