Special Report No. 167
There is a growing perception in Washington, DC, that the U.S. corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. base may be eroding due to either the bank secrecy of “tax havens” or the so-called tax loopholes that are said to “encourage American businesses to shift jobs overseas.”
Indeed, Congress recently held hearings to consider ways to modify bank secrecy rules so that taxpayers won’t easily avoid paying tax by sheltering overseas income in low-tax countries. Meanwhile, President Obama’s FY 2010 budget submission promises to raise more than $200 billion in new tax revenues from U.S. companies by restricting their ability to defer paying taxes on profits earned abroad and by modifying their ability to allocate various business expenses between U.S. and foreign subsidiaries.
Clearly, the U.S. government should demand that taxpayers follow the law and pay legally owed taxes. But lawmakers need to be careful not to confuse the act of wrongful tax evasion with the effects of global tax competition. U.S.-based firms are already at a competitive tax disadvantage compared to firms based in other major trading nations. Confusing tax evasion with tax competition could lead to policy changes that put the U.S. economy at an even greater competitive disadvantage.
While some lawmakers, such as Ways and Means Chairman Charles Rangel, have given a nod to the notion of cutting the corporate tax rate, the changes to the international tax ruleInternational tax rules apply to income companies earn from their overseas operations and sales. Tax treaties between countries determine which country collects tax revenue, and anti-avoidance rules are put in place to limit gaps companies use to minimize their global tax burden. s proposed by the Administration would actually undermine the benefits of lower rates and make U.S. firms and employees less competitive abroad.
OECD countries such as Ireland, Poland, the Slovak Republic, and Switzerland have enjoyed an influx of foreign capital and investment not because they are “tax havens” but because they have dramatically lower corporate tax rates than the United States, France, Germany, Great Britain and Japan. Until these high-tax countries lower their corporate tax rates, they will continue to lose ground—investment and jobs—to lower tax competitors.
An increasing amount of economic evidence suggests that dramatically cutting the U.S. corporate tax rate while maintaining the current system of deferral (or, perhaps, moving in the direction of a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. ) would make U.S. firms more competitive abroad while improving the wages and living standards of U.S. workers at home. This paper explains why the effects of global tax competition should not be confused with “harmful tax practices” or tax evasion, and how far out of step the U.S. corporate tax system—both the rates and international tax structure—has become in comparison to most other developed nations.Share