Everyone wants to save a buck. According to a study, many U.S. companies save on taxes by shifting profits overseas. That’s a problem for the United States because our government thus misses out on that revenue. It’s a growing problem.
In the report, “Profit Shifting and U.S. Corporate Tax Policy Reform,” published May 10, Kimberly A. Clausing starts with acknowledging the fact that the current corporate tax system is broken. “The United States has one of the highest statutory corporate tax rates among peer nations, yet we raise comparatively little corporate tax revenue as a share of our gross domestic product, or GDP.” She calls the system “incoherent” and says that this results in unfair tax treatment for companies, depending on how they’re organized. In practice, big U.S. multinationals get away with tax dodging.
Clausing points out that there are a few key problems with our current corporate tax system, namely:
· U.S. multinational corporations reduce federal tax revenues by more than $100 billion annually through profit shifting, moving money to arms of the company in countries with lower tax rates.
· Profit shifting to countries where corporate tax rates are less than 15 percent accounts for about 98 percent of the revenue loss. Profit shifting to just seven “tax-haven countries” accounts for 82 percent of that.
· At home, we have seen a fivefold increase in revenue loss due to profit shifting over the past decade.
The seven tax-haven countries Clausing referred to — Bermuda, the Cayman Islands, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland — have a less than 5 percent effective tax rate. For corporations, the effective tax rate is the “average rate at which its pre-tax profits are calculated.” By shifting their profitable divisions overseas, companies thus save millions.
Analyzing data from the U.S. Bureau of Economic Analysis focused on U.S. multinational firms, Clausing found that $77 billion to $111 billion in corporate tax revenue was lost in 2012 alone. This year, the Treasury Department will lose out on an estimated $94 billion to $135 billion.
As a way to combat profit shifting, Clausing suggests incremental reforms that would allow businesses to adjust to a new way of doing business. She recommends “repealing check-the-box regulations that facilitates income shifting; tougher earnings stripping laws; [and] anti-inversion rules such as an exit tax.” An inversion is when a U.S. company merges with a smaller foreign company in order to acquire its lower tax rate.
Income shifting often is done through the assignment of patents to low-tax overseas subsidiaries. Inversions are done through the merging or buying of smaller foreign companies and moving the company’s headquarters overseas where there are also — you guessed it — lower tax rates. An exit tax would charge U.S. firms for leaving home, discouraging the practice.
Clausing calls for more changes to reform systemic problems, including “worldwide consolidation of corporate returns for tax purposes [and] formulary apportionment of international corporate income, using a method similar to that used by U.S. states in taxing national income.”
Business groups and corporations complain that the current tax rate is too high, but it seems clear that many companies have figured out a way around that. Most multinationals aren’t paying taxes at our corporate rates anyway.
Predictably, corporate tax rates have factored into the 2016 elections: the Republicans are largely in favor of lowering corporate tax rates while the Democrats are at least passively for raising them. Perhaps we’ll see reform in the coming years, but one thing’s for certain — thanks to Clausing’s report, a much-needed conversation is happening.
-Megan Winkler
Sources:
https://www.washingtonpost.com/news/business/wp/2016/05/10/u-s-companies-are-saving-100-billion-a-year-by-shifting-profits-overseas-report-says
http://equitablegrowth.org/report/profit-shifting-and-u-s-corporate-tax-policy-reform
http://www.investopedia.com/terms/e/effectivetaxrate.asp
https://ballotpedia.org/2016_presidential_candidates_on_taxes
Unfortunately with all the new and existing rules and regulations and the high corporate tax rates it’s causing American companies to use foreign tax shelters and moving operations to foreign countries. We need to make it easier for American companies to conduct business here.
No, Mike, US firms faced with the highest corporate income tax in the (1st) world (35%?) are AVOIDING taxes, not a crime (yet!).
Yep, and The Donald is just the man to encourage Congress to reduce taxes and regulation by incentivizing business to bring manufacturing back home.
Trump is a business man who knows how to produce jobs and a profit. When it’s all said and done the United States is a business that can and should be able to run at a profit instead of the ridiculous way it’s being run now. The huge percentage of people in Congress have never had a real job in the business world, all they know is politics and that’s what’s killing our country. Obama never had a job, never lead people, never had a budget to deal with, he was a community organizer, he’s as useless as teats on a bull when it comes to business and economics and it shows. Trump can and will get our country back on track, not only because he know how to do it but because he loves our country unlike Obama.
Yo: Totally agree with all of the posts so far. The asses in All branches of Government, will never get it, and need to be removed from office. They broke away from the true Republic, under Common Law, that this country was created as; and due to Lawyers being allowed to break the Separation of Powers Act, created a second US Constitution…unknown to American Citizens. Lawyers are not allowed in all 3 branches of government, where they can screw things up, creating conflict, where there is none, and removing people to use common sense, to solve everyday problems among ourselves. They made the US and every State a Corporation, modeled after Washington DC…which is why in Courthouses there is a “Maritime American Flag”, subverting the original law of the land, this country was founded upon. You are screwed before you enter the courthouse, via a Birth Certificate and a Social Security Card, making you now a Commercial entity!
Then they create treaties such as NAFTA, GATT and TPP to feather their own nests, screwing Joe & Mary lunch bucket, American Citizens. and force everyone to use the “Services” of a Attorney, to solve problems.
Think I am full of it…Do the the research; this criminal shift occurred before the 1900’s, which is why there is no justice. Education used to be taught in schools; not it is Indoctrination…which is one of the reasons no one has the guts, to stand up and demand our useless “Duly Elected” won’t throw out, impeach and criminally charge the clown in the oval office. This is no longer the Land of the Free; they are creating Racism; political carnage; dumbing down the population, for a one world system; destroying the middle class, so that there will only be the rich and the poor, which can be controlled, by taking away their handouts and freebies.
This is not what our troops fought and died for on this holy Memorial Day! Kick Ass Donald Trump, and wear you body armor please! God Bless America and pray for her, we are in deep troubles!