Republicans have made big news this week. First, House Ways and Means Committee Chairman David Camp (R-MI) released his plan on reforming the corporate tax code. The plan calls for cutting the corporate tax rate from 35 to 25 percent and implementing a “territorial system” that would exempt U.S. corporations from paying taxes on money they earn overseas.
Speaker Boehner also mentioned a territorial system while speaking at the Economic Club of New York saying “Republicans are looking seriously at a territorial tax code.” Pat Garofalo’s wrote:
Currently, U.S. corporations pay to the Treasury the difference between the tax rate of the country in which they earn money and the U.S. rate. (So money earned in a country where the rate is 25 percent would require a corporation to pay 10 percent — the difference between 35 percent and 25 percent — to the U.S.) However, corporations are allowed to defer paying their U.S. share of taxes until the bring the money back to the U.S., giving them every incentive to shift and keep money (and jobs) offshore.
I must admit I had no idea what a territorial tax code is. It would exempt U.S. corporations from paying taxes on money they earn overseas. Citizens for Tax Justice reported on this:
Under a territorial system, the offshore profits of a U.S. corporation would be exempt from U.S. taxes. A recent report from Citizens for Tax Justice explained that this would cause serious problems.
First, corporations would have a greater incentive to engage in profit-shifting, meaning practices used to disguise U.S. profits as foreign profits. A common example is the manipulation of transfer pricing to shift corporate profits into tax havens (countries that do not tax, or that barely tax, certain types of profits).
Second, corporations would have a greater incentive to shift actual operations — and jobs — to other countries.
Our current system already encourages these practices because U.S. corporations are allowed to “defer” their U.S. taxes on their offshore profits. But the incentives would be even greater under a territorial system, in which corporations would NEVER pay U.S. taxes on their offshore profits.
Other countries that have adopted territorial tax systems are experiencing these problems, and the European Union is considering adoption of a different system to allocate profits among EU member states.
As CTJ’s report explains, the best alternative would be for Congress to repeal the rule allowing U.S. corporations to “defer” their U.S. taxes on offshore profits. Corporations could continue to get a credit for any taxes paid to a foreign government (just as they do now) which prevents any profits from being taxed more than once.
Repatriation of corporate profits earned overseas
Mr. Boehner also spoke on Monday about the possibility of a tax holiday that would allow corporations to bring the profits they earned overseas back to the U.S. without being taxed. During the Bush Administration in 2004, Congress did this and CTJ reported that there were several studies on the results of the 2004 repatriation and they showed the repatriated profits went to shareholders and not to job-creation, despite the promises made by corporate lobbyists.
Speaker Boehner, during the same speech on Monday, also “demanded that ‘trillions’ be cut from public services — a goal that would be impossible without sharply cutting Social Security, Medicare, and Medicaid.
In summary, the Republicans GREAT idea on reforming the corporate tax policy will end up lowering even further corporate taxation and incentivizing corporations to shift their operations overseas. At the same time they want to gut the services like Medicare, Pell Grants, Education funding…basically anything that helps the working class.
These guys really do live in a bubble.