By Vincent Carroll (Denver Post):
In the wake of the Senate’s publicity stunt — er, subcommittee hearing — last month showcasing Apple’s entirely legal offshore tax practices, I asked Colorado’s senators if they favored simple steps to entice that company and others to repatriate tens of billions of dollars in income to the United States.
First, do they support lowering the corporate tax rate?
Second, do they favor moving to a system where income is taxed solely in the country where it is earned, as our major trading partners do?
Currently the U.S. insists on taxing income earned abroad when it is repatriated, with deductions for taxes already paid overseas. So lots of money remains parked abroad rather than face our punishing corporate rate of 35 percent, one of the highest in the world.
“Sen. [Mark] Udall does favor lower overall corporate tax rates,” his spokesman responded. More broadly, he supports a comprehensive approach to tax reform that “simplifies the tax code and reduces the number of loopholes and deductions.” But the Democrat “was still studying the idea” of moving to the so-called territorial tax system because he wants to avoid unintended consequences.
Sen. Michael Bennet’s spokesman offered a similar response. “Yes, he would like to lower the rates as part of a comprehensive package that simplifies the code,” eliminating “carve outs that may have made sense in the 20th century but don’t necessarily make sense now.” But while Bennet was “open to constructive ideas to make the international tax system work better,” he had not endorsed an end to double taxation of foreign earnings.
On the one hand this is encouraging. It confirms the broad political consensus for lowering corporate tax rates while trimming loopholes that allow some major companies to avoid taxes altogether. From President Obama to free-market purists, everyone seems to agree on these two approaches.
But the senators’ answers are also discouraging because lowering the corporate rate even to the developed world average of about 25 percent by itself won’t lure much income home. By far the bigger obstacle is double taxation, and yet Democrats seem reluctant to embrace what should be no-brainer reform.
Harvard Professor of Finance and Law Mihir A. Desai, a leading critic of the U.S. corporate tax code, explained recently in an interview with CoBank’s online publication Outlook why the current system is counterproductive.
“Consider the problem for a U.S. corporation competing with, say, a German company that’s operating in Brazil,” Desai said. “The German firm will pay the Brazilian tax rate, not the German tax rate. And the U.S. company will have to pay both the Brazilian rate and the U.S. rate if it repatriates money home. So if we say U.S. companies should pay the U.S. tax no matter what, U.S. companies won’t be doing terribly well compared with other companies that are not faced with double taxation.”
Desai says we ought to want U.S. companies to succeed abroad because the evidence suggests those that do tend to be more productive than purely domestic firms. They also, on average, invest more at home, believe it or not.
At the Senate hearing last month, Sen. Rand Paul, R-Ky., launched into an eloquent denunciation of Congress for “chasing the profits of great American companies overseas.”
“Instead of Apple executives,” he said, “we should have brought in here today a giant mirror so we could look at the reflection of Congress because this problem is solely and completely created by the awful tax code.”
And also by the reluctance of that same Congress to take obvious steps to undo the damage.