I wrote a column for this paper in the spring that said I would not hold my breath while waiting for much-needed comprehensive tax reform. And it was a good thing I didn’t, because my face would be awfully blue by now.
However, there is a small beacon of light shining in this very dark tunnel. It is by no means a plan for comprehensive federal tax reform, but it is a step in the right direction. The idea is focused on corporate tax reform – which is particularly important because the United States has such a high rate for corporations.
American companies pay the third-highest marginal tax rate in the world – 39.1 percent – according to the non-partisan Tax Foundation. Only Chad and the United Arab Emirates have a higher corporate tax rate.
The U.S. corporate tax rate is actually 16.5 percent higher than the worldwide average of 22.6 percent. With such a high tax rate, multinational corporations have found ways to have as little of a tax burden as possible. One way to do this is to “store” profits in foreign countries with lower tax rates – which at this point is essentially any other country.
Under our tax law, companies have to pay taxes on all profits earned within the U.S., but they also have to pay foreign governments taxes for profits earned in those foreign countries. This seems to be normal, but the U.S. tax code finds ways to complicate it.
If a company brings back the profits made outside our country, it receives a credit for the foreign taxes paid. But it then has to pay its U.S. tax liability above that amount.
The D.C. term for this is the repatriation tax. It essentially punishes businesses for bringing money back to the U.S. to invest. Because of our exorbitantly high corporate tax rate, there is about $2.2 trillion that has not come back to America.
Another way to avoid America’s high corporate tax rates is for a company to go through the process known as “inversion.” This is where an American company purchases or merges with a foreign company to move its headquarters outside the U.S.
One of the most well known examples of this was when Burger King merged with Canada’s coffee and breakfast restaurant chain, Tim Hortons. By moving the new company’s headquarters to Canada, any profits made outside of the U.S. would no longer be subject to the 39.1 percent tax rate – saving the company likely millions of dollars in the long run.
Now Congress – and possibly the president – is looking for ways to keep more money invested in the American economy.
Multiple plans have been floated that would allow corporations to bring profits back to the U.S. during a certain time frame and pay a lower repatriation tax rate. One bipartisan plan would even create a slightly lower tax rate for overseas profits moving forward.
This is great news for businesses that have grown outside of our country and want to bring back the profits to create more jobs in America. However, this type of plan raises some concerns. While I am all for lowering taxes on American companies – and individuals for that matter – I am left wondering why only large multinational corporations would be benefiting.
What about the companies that operate solely within the borders of the United States? These businesses are still stuck paying nearly a 40 percent tax rate. By only helping multi-national corporations, an uneven playing field would be created.
It is understandable that congressional leaders would want to get as much money back in the American economy as possible, but the policy should not create winners and losers. That just screams “crony capitalism.”
Instead, Congress needs to find a way to make our tax code more competitive for everyone – not just the companies that can afford to operate globally. If the U.S. lowered its corporate tax rate to be near the worldwide average, it would be less advantageous to “stash” money overseas. This would bring more money into the U.S. economy and level the playing field for every business.
A plan like that would lower taxes for all businesses and help create more jobs in America. Now that is the type of comprehensive reform I can get behind.