By Akash Chougule
With the budget deal resolved (albeit poorly), Congress has potentially opened the door on another important issue – tax reform. The federal tax code has not been reformed since 1986, and costs businesses almost three billion hours and $160 billion every year. Though the need for change is obvious, ideological differences have continued to divide the two parties, as President Obama and the Democrats remain focused on their redistributive, big-government agenda – showing little concern for harmful spending levels and the resulting increased tax burden on all Americans. Senate Finance Committee Chair Max Baucus (D-MT) released his first proposals in November, emphasizing much-needed reform to corporate taxation, especially the way international earnings are taxed. However, the Baucus plan is far from ideal. Republicans should not endorse this plan that continues to burden businesses with a costly, unfair, and complex system. Instead, they should propose a plan that simplifies the tax code and removes disadvantages on American businesses abroad.
There is roughly $2 trillion sitting idle overseas with subsidiaries of American companies. America’s 35% corporate tax rate and the current structure of the tax code are preventing that money from being brought back into the United States and invested here at home.
In the current “worldwide” system, American companies must pay the corporate tax where income is earned, and then pay the difference when the money is repatriated, or brought home. For example: if an American company earns $1 million in Ireland, it pays the Irish rate of 12.5%, or $125,000. Upon repatriation, it must pay an additional $225,000 – the difference between Ireland’s rate and the United States rate.
The U.S. is the only country that uses this worldwide system that also has a corporate tax rate above thirty percent – placing American businesses at an enormous disadvantage compared to their foreign competition.
While Senator Baucus does want to lower the corporate rate below thirty percent, he does not propose moving to a “territorial” system, which exempts from taxation repatriated income. Any serious tax reform plan must tackle this essential reform.
His primary plan is a 20% repatriation rate over eight years, which would cost businesses more than $200 billion. Other ideas in the Baucus proposal include systems where repatriation tax only applies if the foreign rate is under 80% of the American rate, or only applies to 60% of the income being repatriated. These proposals do not do enough to remove the disadvantage to American business, and surely do nothing to alleviate compliance costs that come with the complexity of the tax code.
Both the United Kingdom and Japan have eliminated their tax on repatriated income. The United States should begin to even the playing field by following suit.
Congress should move the U.S. entirely to a territorial system. This change would reduce compliance cost and allow capital to move freely back to the United States, opening it up for investment and economic growth at home. While liberals continue to insist on taxing value creation, conservatives should propose a plan that rewards the creation of prosperity and encourages companies to bring profits back to the US to improve the lives of American families here at home.