While all of America was watching the Super Bowl, President Obama was more interested in started a conversation about taxes. Sunday, the president unveiled his version of tax overhaul. One of the main provisions was a one-time tax on overseas corporate earnings.
The Wall Street Journal had this story by Nick Timiraos and John D. McKinnon:
President Barack Obama is making an opening bid on overhauling corporate taxes and linking it to boosting infrastructure spending, a move that could clear a rare path toward common ground in a deeply divided capital.
Mr. Obama wants U.S. companies to pay a 14% tax on the approximately $2 trillion of overseas earnings they have accumulated, a White House official said Sunday. They would face a 19% minimum tax on future foreign profits. Companies could reinvest those funds in the U.S. without paying additional tax.
In making the pitch in his 2016 budget plan due Monday, the president is elevating two issues that previously gained traction with lawmakers of both parties: changing the tax code on overseas profits and raising spending on highways and transit systems.
Doug Holtz-Eakin, a conservative economist and former adviser to GOP presidential candidates, said the proposal appears to be a starting point for broader negotiations with lawmakers.
“The good news seems to be that the administration has agreed that lockout [of overseas profits] is an important phenomenon,” said Mr. Holtz-Eakin, president of the American Action Forum, a conservative think tank. He said he is concerned about the proposed tax-rate structure. “But let’s face it, it is an opening bid, not a result,” he added.
Megan Murphy, Vanessa Houlder and Sam Fleming wrote for The Financial Times that the rate is half the normal U.S. tax rate:
The proposed tax is less than half the top corporate tax rate in the US, which stands at 35 per cent and which critics claim gives incentives to American companies to hoard earnings abroad instead of investing them at home.
The proposal is likely to attract opposition, and would mean a significant tax rise for companies, particularly in the technology and pharmaceuticals sectors that have been shifting profits to low-tax countries such as Ireland and Bermuda.
Critics say the existing offshore cash mountains testify to the aggressive foreign tax planning by US companies, while businesses cite them as evidence of the handicaps they face under an uncompetitive US tax regime.
Mr Obama will also propose a 19 per cent tax on future foreign earnings, giving companies a credit on foreign taxes and allowing them to be reinvested in the US with no additional penalty. Under the current system, US companies pay little or no tax on their earnings abroad until they are brought back into the US.
The money raised would be used to fund about half of an ambitious six-year programme of highway, bridge and transit upgrades, one of the president’s main priorities during his final two years in office and an initiative that has attracted some degree of bipartisan support. The remainder of the programme would be financed by the existing highway fund.
Jeff Mason and Kevin Drawbaugh wrote for Reuters that tax reform will not be easy:
Tax reform has eluded Washington for decades. There has been renewed talk about it this year, but consensus is still far from evident. Obama has already offered to cut the corporate income tax, but he wants to offset the revenue losses that would result by closing loopholes. Republican proposals have varied, while generally seeking deeper cuts in the rate and fewer loophole closings.
The White House said that under the new approach to foreign earnings companies would have to pay a 19 percent tax on all foreign earnings as they earn them, while continuing to get tax credits for foreign taxes paid. After this payment, foreign earnings could be reinvested in the United States without added tax.
The president’s proposal also includes cracking down on corporations that shift profits to tax havens to avoid paying their fair share or undertake “inversion” deals in which they reincorporate abroad to avoid paying U.S. taxes.
The one-time tax “would mean that companies have to pay U.S. tax right now on the $2 trillion they already have overseas, rather than being able to delay paying any U.S. tax indefinitely,” a White House official said.
The Bloomberg Businessweek story by Richard Rubin and Jonathan Allen outlined how the rules could have a substantial benefit to corporations:
Because tax rules call for paying the difference between the foreign tax rate and the 35 percent corporate levy, that means the company could have paid as little as 3.1 percent in foreign taxes on that income.
Obama wants to lower the corporate tax rate to 28 percent, and 25 percent for manufacturers. Republicans want a 25 percent rate for all corporations.
A 19 percent minimum tax on foreign earnings — without an extra layer of tax upon repatriation — could give companies an incentive to move profits overseas.
It would also mean that U.S. companies operating in most major industrialized countries would owe little or no U.S. tax on those profits. The exception would be places such as Ireland, with its 12.5 percent corporate tax rate.
Obama’s proposal, however, will include rules that would make it harder for U.S. companies to shift profits overseas or to change their addresses through inversion transactions, according to the administration document.
It seems that Obama is trying to get the conversation started about tax reform, but that there’s a long way to go before things are settled. There are so many different agendas that would need to be reconciled before changes can be made. But the fact that there’s a beginning to the conversation is something.
