Fixing Corporate Taxes Is a No-Brainer

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Why do lawmakers ignore their constituents’ opinions on tax issues? Polling shows that large majorities of Americans want corporations to pay more in taxes, and yet President Obama and both parties in Congress are committed to a corporate tax reform that is “revenue-neutral,” meaning corporate tax loopholes can be closed, but the revenue saved should be handed back to corporations as a reduced tax rate.

After researching tax issues and lobbying for stronger corporate tax provisions for several years, I can tell you that part of the problem is that few people, other than corporate lobbyists and the vastly outnumbered good government groups like mine, understand these issues. Senators don’t know the ins and outs of corporate taxes—how could they?—and when they need information, the corporate lobbyists show up and provide their skewed version of the facts.

Just to take an example, consider corporate America’s latest obsession, which is to get Congress to enact a “territorial” tax system. This is a euphemism for a corporate tax that completely exempts the offshore profits of our corporations. You might think a lawmaker would be wary of presenting such a proposal to her constituents. Build cars in China, you’re exempt from U.S. taxes, build cars in Detroit, pay the U.S. corporate tax! 

One argument corporate lobbyists use to swindle lawmakers is that most developed countries have adopted territorialism, which proves—so goes the argument—that it’s the most workable way to tax multinational corporations. And while conservative and “moderate” lawmakers are never swayed by other developed countries’ examples when it comes to providing health care, subsidized education and training and those astoundingly long mandatory vacations, they’re suddenly all ears when it comes to looser tax rules for multinationals.

Anyway, these other countries don’t completely exempt their corporations’ offshore profits from their taxes, but the corporate lobbyists nonetheless claim that’s what America needs to do.

Here’s some background. The U.S. corporate tax system is already a mess. We don’t exempt the offshore profits of our corporations, but we do allow U.S. corporations to “defer” (delay) paying U.S. taxes on their offshore profits until they “repatriate” those profits (bring those profits to the U.S.). This creates two problematic incentives for corporations.

First, corporations can reduce their tax bill if they shift operations (and jobs) to a country with a lower corporate tax rate, because they can “defer” their U.S. corporate taxes indefinitely. This is a real problem, but it’s also important to note that most countries where American companies do real business do not have lower corporate taxes than the U.S. A study we published a year ago found that most profitable Fortune 500 companies pay lower taxes on their U.S. operations than on their foreign operations—which flies in the face of corporate lobbyists’ constant complaint that U.S. taxes are killing their companies.

Second, even if U.S. corporations don’t actually move their operations offshore, they can use shady transactions to make their U.S. profits appear to be earned by subsidiaries in countries with very low or even no corporate tax at all (i.e., offshore tax havens). These “subsidiaries” are often nothing more than a post office box, and the tax havens are often small countries where there is little real business.

A territorial system would make both these problems worse. If allowing U.S. corporations to defer paying taxes on their offshore profits encourages them to shift jobs and profits offshore, then completely eliminating U.S. taxes on those profits will only increase those incentives.

And the reality is that European countries are having a lot of problems with their territorial tax systems. Ireland and the Netherlands, for example, have played starring roles in tax avoidance schemes used by Google and other companies that are known as the “Double Irish” and the “Dutch Sandwich.”

The smart way to reform our international corporate tax rules is to simply repeal deferral so that U.S. corporations are taxed the same whether their profits are earned here or abroad. The corporate folks complain that this amounts to double-taxation, but that’s completely untrue because there’s already a tax credit in place that allows corporations to reduce their U.S. tax bill by the amount of taxes they’ve already paid to foreign governments.

Too many members of Congress are loath to offend corporations, but they also feel pressure to rein in the budget deficit and they’re looking for revenue. If the alternative is cutting popular programs like Medicare, Social Security and education, the answer may become so obvious that even politicians figure out the right thing to do.

Photo via Flickr (cc) user 401(k) 2012.