When a United States based corporation opens up subsidiaries in other countries, the US government doesn’t get a cut of the profits in the form of taxes. This is a very common tax tactic used by megacorporations to avoid paying high US taxes. The foreign subsidiaries flip the money around to the countries with lower taxes which saves the company money. It also robs the US of needed tax dollars.
Unfortunately there isn’t anything illegal about this practice. Companies can legally set up operations in other countries and claim revenues earned in those countries deserve to be taxed there. It just becomes really convenient when a majority of those countries have much lower corporate tax rates than the US. Nonetheless lawmakers have struggled to come up with a solution that would encourage companies to bring those profits back to the US, pay tax on them, and use the money to invest in the economy. Is that a good idea?
Corporate Profit Repatriation Holiday
The idea is consistently thrown around that the US government should allow a “corporate profit repatriation holiday” to encourage companies to bring profits home. With this type of tax holiday companies are allowed to move profits off of their foreign operations and back to the United States. To encourage companies to do this, the tax rate on those profits is slashed. The government gets a smaller cut, but a smaller cut of something is considered better than a large cut of nothing. The idea also touts the benefit that more profits based in the US side of things would lead to greater investment in jobs, innovation, technology… all things the government wants to promote.
This sounds like a fine idea…
…until you discover we had a repatriation holiday in 2004 and despite the loud push by big business that they would absolutely reinvest in the United States economy, the money saved on taxes really went to boost dividend payments and to repurchase company shares. In plain english, the companies kept the money and used it to make their shareholders more wealthy. (There’s nothing wrong about this from a corporate governance standpoint, it just looks a little bad. “Oops! We forgot to invest in the economy like we said we would. Oh well! Here, send that extra money to our shareholders.”)
The executive teams of these organizations simply took advantage of a tax benefit — just like you and I do when a new item can be deducted on our taxes. In short, if the government said you could pay significantly less on tax on your income today as long as you claimed it all today, you’d probably do it, too.
Competitive Corporate Tax Rates
A better way to get a slice of the pie would be for the government to come up with more competitive tax rates for corporations. Companies already employ a herd of accountants to figure out the best way to reduce their tax liability each year. A report (pdf) by Citizens for Tax Justice shows just how ridiculous the tax situation is for companies: 26 large companies like General Electric, Boeing, and Verizon paid no corporate tax on profits from 2008 to 2011. (A quick write up of the report is online at the Washington Times.)
Better tax rates would encourage companies to keep profits here. There’s no sense in setting up a foreign subsidiary just to pay lower tax rates if you could just pay lower tax rates here.
However, that doesn’t solve all of the problem because of the aforementioned loopholes in the tax system that allow megacorporations to pay nothing in tax liability while the average American pays thousands. The thought that a company like GE could earn $83 billion in pretax corporate profits over the last decade and only pay essentially a 2.3% tax rate over that time period while workers pay a minimum of 10-20% after deductions and credits is baffling to me. If you make it easier to bring those overseas profits back to the US, those firms are likely to just find ways to get around paying taxes anyways. And if you keep giving corporations a holiday on bringing those profits back, they’ll just hold out and wait for the next tax holiday before bringing the profits back. A complete overhaul of the entire system is, in my opinion, what is really needed.
So, how would you fix the corporate tax system in the United States?