Amid all the drama swirling around the approaching "fiscal cliff" and efforts to shrink the $16 trillion debt load, a sideshow is going on that threatens to actually increase the U.S. deficit.
The issue: the U.S. corporate tax rate, which at 35% is the highest rate in the world, and a rate few companies actually pay. The average U.S. corporate tax rate is just 12%, says Nicole Tichon, executive director of Tax Justice Network USA, a nonprofit organization that supports closing loopholes and ending distortions in taxes and regulation.
U.S. multinational companies and lobbyists are using the hysteria over the fiscal cliff to push for an elimination of taxes on overseas profits as part of a broader tax reform plan, says Tichon. Under the current system, U.S. corporations operating overseas pay taxes only when they bring those profits back to the U.S., and they deduct any foreign taxes they've paid from that bill. As a result, many companies maintain those overseas operations and profits indefinitely, Tichon says.
Corporations argue that they would repatriate profits — which would benefit the U.S. economy — if they didn't have to pay taxes on those profits. They favor a so-called "territorial system" that taxes only corporate income earned within a country's borders. If a multinational earns those profits outside the U.S., then they wouldn't have to pay U.S. taxes on it.
The presidential commission created in 2010 to develop a sustainable fiscal plan for the U.S. (better known as Simpson-Bowles) supports such territorial treatment of corporate profits earned overseas. So does The Committee to Fix the Debt, a nonpartisan coalition of corporations, trade groups and politicians dedicated to developing a comprehensive long-term plan to cut the U.S. debt and deficit.
President Obama, in contrast, supports a minimum tax rate on foreign profits of U.S. multinationals but hasn't said what that rate would be.
Tichon endorses the president's approach. "We would support a minimum tax for multinational corporations for their offshore profits…if the rate was high enough and we weren't going to be losing additional revenues," she tells The Daily Ticker.
Could that make U.S. multinationals less competitive in the global marketplace?
Tichon doesn't think so. "We don't have any evidence that corporations will pick up and move house," she says. "Businesses should be rewarded and thriving based on their innovation, their products and their services and not on who can come up with the best tax tricks."