Monday, December 3, 2012
Amid the tumult over looming tax hikes and spending cuts, a massive change to the corporate tax code is quietly gathering steam.
U.S. multinationals have spent years pushing for a reform of the tax code that would eliminate taxes on business profits overseas, just as these firms are banking their futures on growth abroad.
Now, with the debate over the country’s fiscal future in the spotlight, many executives, lobbyists and some on Capitol Hill are latching on to the “fiscal cliff” as a potential springboard for their cause.
To the companies, no other element of tax reform matters more.
They say that U.S. multinationals face a disadvantage against overseas competitors because unlike many other developed countries, the IRS collects taxes on foreign income when it’s brought back into the United States. These companies argue that if that tax were eliminated, they would be more likely to bring their overseas earnings back to the United States. It’s estimated that U.S. multinationals are holding $1.7 trillion in earnings abroad, largely to avoid being taxed at a 35% rate. ...
Some tax experts warn, however, that such a change could radically alter how companies behave and have broad implications for the economy. Without the right safeguards, they say, eliminating taxes on foreign profits and switching to what’s known as a “territorial” system would blow a hole in tax revenues, give multinationals more leeway to exploit tax havens and drive jobs overseas. “The territorial tax system they envision would gut the entire U.S. corporate tax code,” said Edward D. Kleinbard, a professor of tax policy at the University of Southern California. “It would lose gigantic sums of money every year.” ...
Kleinbard, the USC tax professor, wondered why corporate tax reformers aren’t looking first at the higher rates paid by domestic firms that don’t have overseas operations. “Of course we need a lower corporate tax,” he said. “If we’re going to start with lower tax rates, maybe we should start with lower taxes for domestic operating business so they can expand. Wouldn’t that be our first priority?”