If you reward bad behavior you create an incentive for the bad behavior to continue. This is certainly the case with taxes on profits made outside the country. Rewarding multinational companies for keeping profits outside of the country has cost us jobs and tax revenue.
Today’s NY Times editorial Jobs and Taxes gets it right — and wrong. The editorial looks at President Obama’s proposal this week for “revenue-neutral” corporate tax “reform” with one-time “fees” to pay for a small bit of infrastructure repair. They correctly point out that this is a “dangerous” plan because “while the proposal would raise money for useful purposes in the short run, it would amount to an unjustified corporate giveaway in the longer term.”
Correct. But there is another danger in the idea, which the editorial gets right — and wrong. The editorial warns,
Similarly, the proposal calls for a minimum corporate tax on foreign earnings of American companies, which could be a step toward greater fairness but stops short of ending the damaging practice whereby companies defer tax on foreign profits until the cash is repatriated to the United States. The proposal does not say what the minimum tax would be. Any repatriation at less than the proposed top rate of 28 percent would encourage companies to keep stashing profits abroad.
Yes, any repatriation at less than the correct tax rate would certainly “encourage companies to keep stashing profits abroad.” The Times’ mistake is that a 28% rate would create the same incentive to keep doing it because the current tax rate is 35%, not 28%. These companies are evading a 35% rate, and rewarding this tax evasion by letting them bring the profits back at 28% just sets us up for more of the same.
In 2004 Congress gave multinational corporations a “repatriation tax holiday,” letting them return profits at dramatically lower tax rates. This didn’t work out so well for the country, economy or shareholders. Of course this incentive caused companies to start keeping even more profits out of the country. Jobs, factories and profit centers were moved to tax-haven countries because the game was defined: Congress hands out tax-holiday gifts so just wait for the next repatriation tax holiday. It is estimated that $1.7 – 2 trillion is now parked outside the country, withheld from taxation — and shareholders.
If this scheme pays off yet again the problem can only get worse. The right answer is to just end the “deferral” that lets these companies pretending the profits are not “in” the country to evade their taxes. That money is supposed the be taxed at the current 35% tax rate, and there is no reason for it to be taxed at a lower rate. End this evasion game now and watch the jobs, factories and profit centers return. And then use a sales-based apportionment system to decide where profits are made.