Wall Street Journal Today:
A J.P. Morgan JPM +1.58% research report estimates that there is $1.7 trillion of undistributed foreign earnings held by more than 1,000 U.S. companies overseas. But only 600 disclose how much of their foreign cash is held offshore. Some like Johnson & Johnson JNJ +0.31% and Illinois Tool Works ITW +1.26% have all their cash in foreign subsidiaries.
According to some as much as 60% of corporate cash is overseas, why? Corporations in America make lots of money overseas the majority of which has already been taxed in the nations it was earned. If the corporation wants to bring that money back to the United States they are required to pay again, typically 35%.
Even though a corporation is eligible for a tax credit equal to foreign taxes paid, the decision to repatriate earnings typically requires that corporation to incur a significant tax cost. As a result, corporations usually find it more attractive to defer U.S. taxation by reinvesting their foreign earnings abroad.
Some Republicans have called for a repatriation tax holiday or a territorial tax system whereby profits are only taxed once in the country they are earned. This seems fair but Democrats have argued that certain profits wouldn’t be taxed at all. The tax code is immense and corporations have whole departments whose job it is to minimize taxes paid. Politicians pass more and more laws and corporations find more ways to get around paying. Massive companies like General Electric have mastered the art of avoiding taxes despite billions in profits.
What is the solution? I propose a corporate income tax rate of zero. Corporations are entities made up of people and those people are all paid in some way eventually whether it be salary, stock or benefits. All of those forms of income are taxed eventually, meaning that a corporate tax is redundant and a form of double taxation. Corporations would still pay plenty of taxes in other forms such as payroll and sales and energy taxes.
Taxation on profits is inefficient as well, The Atlantic:
The corporate income tax encourages firms to waste resources on tax avoidance In general, taxes are most efficient when they fall on those who have the most difficulty avoiding them. Big corporations can and do spend an enormous amount of money and human effort transforming their income into more tax-preferred forms–deferring it, moving it, swapping it with entities that have different tax rules, and so forth. We spend an enormous amount of energy trying to make rules to stop them. It would be a lot easier to get rid of the thing entirely and focus on getting the money from people, who can’t afford quite such large squads of tax attorneys. This would also correct an obvious flaw in the corporate tax code: it’s easier for big companies to afford pricey tax lawyers–and pricey lobbyists to get them special tax breaks.
Surely some will argue that with any change to the tax code there will be some who take advantage of it, and they are correct. The question becomes what can we do to make taxes as fair and efficient as possible and encourage growth that ultimately means more revenue. The answer is simpler laws that are enforceable, it shouldn’t require whole teams of lawyers and accountants to do a businesses taxes. Lets make the code simpler and then focus enforcement efforts on the remaining cheats. What we have now are special interests deciding our tax laws. Thousands of lobbyist exert pressure to get favorable laws and regulations that reduce their clients liabilities. Lets remove the complexity and make the code simple and fair and eliminate the need for special interest lobbying.
Imagine the corporations worldwide that would pour billions perhaps trillions of dollars into the US economy if we had a simpler and lower tax policy. We already try to create incentives for all kinds of special interests like the film industry and alternative energy; so clearly we understand that tax policy influences growth and investment. Government shouldn’t be in the business of deciding who gets special treatment with our money, picking winners and losers.
Some of my progressive friends will call this idea a race to the bottom and say that other countries would follow suit. I agree, I hope they do follow suit and eliminate corporate taxes. I believe in growth and if we reduce tax burdens and make taxes work fairly we will all benefit and governments will have the revenue they need. What governments should spend their tax revenue on is a separate argument for another column. Tax policy is complex and I haven’t answered all the problems here- but I know that we can make our system more equitable with simplicity.