Obama and GOP: What's holding up corporate tax reform?
At first glance, it looked like President Obama and congressional Republicans were miraculously headed in the same direction on corporate tax reform.
Reform plans by Obama and聽GOP leaders such as House Ways & Means Committee Dave Camp (R-MI) seemed聽simpatico. Both sides embraced lower rates. Both endorsed ending business tax subsidies, through neither had much to say about which ones.聽 But on one fundamental issue the gap between Obama and the GOP remains wide.
How would they聽tax foreign earnings of U.S.-based multinationals? Both sides agree that the current system is the worst of all worlds: It is immensely complicated, wildly distorts economic decisions, and collects聽little revenue.
But when it comes to the solution, Obama and the Republicans seem headed聽down聽different roads. Obama wants to force U.S. companies to pay more tax on their overseas profits.聽Many Republicans would exempt offshore earnings from U.S. tax liability.
To understand where reformers are headed, think about today鈥檚 system. Under our current worldwide structure, foreign subsidiaries of U.S.-based firms must pay U.S. tax no matter where they earn their income. To prevent profits聽from being taxed twice,聽those firms get a credit against their U.S. tax for the levies they pay to other countries. 聽
Those foreign tax rates are nearly always lower than in the U.S.聽But because U.S. rates are relatively high, companies game the system to avoid domestic levies on their overseas income, and even to reduce U.S. tax on聽domestic income.
Under a practice known as deferral, U.S. firms don鈥檛 pay U.S. tax until they bring their profits home. This allows them to reinvest earnings in foreign subsidiaries and, in effect, never pay those high U.S.聽rates.
Firms also use sophisticated accounting gimmicks to shuffle income to low-rate countries while shifting deductible expenses back home, where they can offset domestic profits and lower their聽overall U.S. tax liability. Sometimes, they actually move their production鈥攁nd their jobs鈥攐verseas to avoid U.S. tax (though that鈥檚 rarely the most common聽reason).
All of this allows many聽multinational firms to pay effective tax rates聽well below聽the 35 percent statutory rate that is getting all the attention.聽Often they pay less less than they might聽under a territorial system.
What to do?
Obama would impose a minimum tax on multinationals鈥攅ffectively forcing them to pay immediate tax on foreign income even if they never return the money to the U.S. But Obama鈥檚 plan would be incredibly complicated and may drive more companies to move overseas, since the minimum tax would only apply to U.S.-based firms.
Some Republicans would shift the U.S. to a territorial system and effectively abandon efforts to tax active overseas income of U.S. multinationals. All companies鈥攆oreign or domestic鈥� would pay tax on U.S. profits. But domestic firms聽would owe no U.S. tax on overseas income, either when their foreign subsidiaries聽earn it or when they pay it as dividends to their U.S. parent.
This would move聽the U.S. closer聽to the territorial systems used by most聽of the world. But such a shift might encourage some domestic companies to move more of their operations鈥攁nd shift both jobs and聽more reported income鈥� to low tax countries.聽Preventing such an exodus would require a complicated new set of聽rules.
Is there some middle ground between the Obama view and the GOP position? Maybe. 聽Perhaps there is a way to increase taxes on foreign profits as they are earned聽but lower the additional聽tax companies pay聽once profits聽are returned to the U.S.聽This could raise U.S. taxes on income earned in tax havens but reduce the penalty for bringing foreign earnings home. 聽聽聽
But this is complicated, vexing stuff. And it will require honest cooperation among serious tax mavens, not the sort of political one-upmanship that infects most everything else in Washington.
