Wednesday, May 11, 2016
Kimberly A. Clausing (Reed College), Profit Shifting and U.S. Corporate Tax Policy Reform:
This paper argues that the erosion of the U.S. corporate income tax base is a large policy problem. Profit shifting by U.S. multinational corporations is reducing U.S. government tax revenues by more than $100 billion each year, and other countries are facing similar concerns.
Yet given the starting point of the current U.S. corporate tax system, potential reformers face a dilemma. Reforms that would protect the U.S. corporate tax base may not find support in the multinational business community, which is more concerned with perceived competitiveness problems. But reforms that address competitiveness worries—such as the “toothless territorial” system that many in the multinational business community favor—would make the tax base erosion problem far worse.
This paper demonstrates that the perceived competitiveness problems are exaggerated. By all common metrics, U.S. multinational firms are doing quite well. They are not tax-disadvantaged relative to firms based in other peer countries. But the United States, like other non-tax-haven countries, has a large and growing corporate tax base erosion problem that has been fueled by both tax competition pressures and the increased tax avoidance activities of multinational firms, resulting in dramatic increases in income booked in very low-tax countries.
I offer several modest reforms that would improve our system of taxing multinational firms, including incremental steps that would stem tax base erosion, reduce the lockout of overseas U.S. corporate profits, and end the flight of U.S. corporations to overseas tax havens via corporate inversions. I also offer two more fundamental policy options: a worldwide consolidation of corporate returns for tax purposes, and a formulary approach similar to the way in which U.S. corporations determine what share of their national income is taxed across U.S. states. Such reforms would create a more effective and efficient U.S. corporate tax system that better serves the needs of the U.S. economy.
(Hat Tip: Ed Kleinbard.)