U.S.-based multinational corporations are mounting a huge lobbying effort to convince the White House and Congress to give them another repatriation tax “holiday” that would allow them to bring the profits from overseas operations back to the United States at a 5 percent tax rate instead of the usual 35 percent rate.
At first blush, it seems enticing. Global U.S. companies have more than $1 trillion in profits in overseas accounts. They can keep them there and never pay U.S. taxes on them, or they can bring them back, provide tax revenues for federal coffers, and, presumably, use the money to create jobs at home.
But, we’ve been down this road before, unhappily so. President Bush and Congress gave the multinationals their first holiday in 2004, letting them pay 5.25 percent on their repatriated profits.
They brought back lots of money – $362 billion in profits, according to an Internal Revenue Service analysis – but, rather than use it to create jobs as they had promised, studies by the National Bureau of Economic Research and others show that they mostly used it to buy back stock and boost dividends to shareholders. In fact, Tax Analysts found that some of the same firms that repatriated their profits turned around and laid off thousands, if not tens of thousands, of workers in the United States.
Critics also worry that, by providing corporations a second holiday, policymakers will raise expectations of more holidays down the road, giving multinationals more reason to park future profits overseas. The more they do so, the less they pay in corporate taxes, thus boosting federal deficits over the long run.
Even though another holiday is a bad idea, the White House and Congress should address the problem that encourages corporate profit-shifting in the first place – a U.S. corporate tax code with what will soon be the highest marginal tax rate in the industrialized world, which leaves our corporations at a competitive disadvantage with their peers abroad. The current corporate rate induces companies to move their people, their operations, and their profits to lower-tax nations in order to maximize their profits to shareholders,
In theory, U.S. corporations pay a 35 percent marginal tax rate on their profits wherever they earn them. But in practice, they can avoid U.S. taxes by shifting their profits abroad and then keeping them there.
To be sure, a marginal rate (the rate on the last dollar earned) is not the same as an effective rate (the actual tax burden rate after corporations take their write-offs). U.S. corporations pay effective tax rates that are about average across major industrialized nations. Still, even economist Martin Sullivan, a Tax Analysts contributing editor who has strongly criticized corporate profit shifting, argues for lower marginal rates because corporations base investment decisions on marginal, not effective, rates.
The high marginal tax rate makes the United States a tax outlier, raising issues of competitiveness for U.S.-based multinationals. And, unlike many other industrialized countries, state and local taxes add to the corporate burden, effectively raising the U.S. rate to 40 percent, on average. Most other industrialized nations tax corporations only on the profits that they earn in their native countries, and most of those nations have significantly lowered their corporate tax rates in recent years.
From 2000 to 2010, average corporate tax rates fell from 32.8 percent to 25.7 percent, according to the Organization for Economic Co-operation and Development, and Japan’s announced plans to cut its corporate rate will leave the United States with the highest marginal rate among its competitors.
With the economy struggling and job creation lagging momentum is growing in Washington for a corporate tax overhaul. President Obama has called for it, hearings are underway in Congress and a wide array of think tanks and nonprofits are holding conferences on reform (some focused on corporate taxes, some on the entire tax code).
But, as with any major policy change, the sledding won’t be easy. Yes, corporate marginal rates are high. Yes, corporate incentives to shift their operations overseas are real. But, some companies have found creative ways to work within the system, exploit generous write-offs, and pay little if any tax.
Thus, any reform that cut rates in exchange for scaling back deductions will leave major sectors of corporate America with higher tax bills, not lower ones. The New York Times reported earlier this year that young, innovative industries may be on the losing side if they lose their deductions: the biotech industry pays an effective tax rate of 4.46 percent, drug companies pay 5.62 percent, Internet companies pay 5.94 percent, metals and mining companies pay 7.41 percent, and computer companies by 8.65 percent. They won’t be enamored by the promise of a lower marginal tax rate of, say, 25 or 30 percent, if their tax burden actually rises.
Nor will many Americans likely support the idea that the corporate tax rate should be reduced while job creation lags and profits rise.
But, if the politics are tough and the timing less than ideal, the case for a streamlined corporate tax code of lower rates and fewer deductions is increasingly strong. The United States can no longer afford a tax code that encourages the nation’s largest companies to move their operations to more corporate-friendly jurisdictions.
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