Ending Corporate Tax Avoidance: Just the Debate I Asked For!

May 31st, 2013 at 4:12 pm

You may recall a post from the other day calling for a robust discussion of alternatives to our current system for “taxing”—that’s right, it belongs in quotes—multinationals.

Well, here’s an excellent example of such a discussion from the NYT’s Room for Debate column.

The fundamental problem is the ability under our current tax code of multinationals to hide or shelter their income, to book their earnings in places with low or no taxes at all, and then to just leave them there, at least on paper, forever (“deferral”).

Therefore, the solutions thus tend to range along a continuum from either giving up on trying to close the shelters and finding other ways to tax foreign earnings, to making the current system work through international cooperation, to ending deferral.

The corporations themselves tend to want a territorial system, which pretty much locks in what we have today, as my CBPP colleague Chye-Ching Huang points out.

Why not end the “deferral” benefit and tax foreign profits every year, like all other taxes? Corporate lobbyists have another idea: a 0 percent or very low U.S. tax rate on their foreign profits. They give this a sophisticated name — a “territorial” tax regime. It would get rid of the incentive for multinationals to keep profits offshore, but it would increase their incentive to shift profits and investments overseas in the first place.

Avi-Yonah, suggests that going territorial may seem ideal given the way globalization has muddied corporations’ national identities, but:

…as the Apple case shows, such a territorial system invites multinationals to shift their profits to tax havens. Avoiding that outcome without over- or under-taxation requires a degree of coordination among countries that is difficult to achieve.

So what should we do?

Chye-Ching is right that ending deferral is the right place to start the negotiations (Hungerford agrees, calling it the “simplest and most direct way of taxing offshore income”).

Moving down the continuum, Altshuler argues for a minimum tax on foreign earnings, an idea the White House also supports.  It’s actually a simple and elegant solution in that it says to the Apples and Googles and GEs of the world, “go ahead and serve up your double Dutch Irish sandwiches, but first the US Treasury’s going to impose a tax of X%–she says 15%–on all your foreign income.”

Auerbach also suggests we stop trying to figure out where companies actually reside or where they produce their assets and income, and just have a destination tax on a firm’s earnings based on where its products are sold.

…earnings from the production of a smart phone sold in the United States would be subject to U.S. corporate tax, regardless of the company’s residence or where the company reports its production to have occurred.

The nice wrinkle here is that once you determine a MNCs liability based on the destination of where it makes it sales, it has no incentive pretend it’s sourcing everything from a beach in the Cayman’s.  That said, I’m not convinced that firms with less tangible products than smart phones couldn’t find ways to make it look like their selling everything somewhere that happens to have a zero tax rate.

But the main thing is that we keep this conversation alive until we get somewhere with it.  I don’t believe there’s much oxygen here in DC for all out tax reform, but corporate tax reform might have a chance, especially since the White House has agreed it should be revenue neutral (a big concession as far as I’m concerned, but there it is).  Closing down international tax avoidance should be a key part of that reform.

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6 comments in reply to "Ending Corporate Tax Avoidance: Just the Debate I Asked For!"

  1. D. C. Sessions says:

    I still don’t see any solution to the Solar Spice and Liquors dodge: have all of the design, production, and sales conducted with minimal markups by contract manufacturers and distributors. Absorb all of the major profits in a front corporation actually incorporated and located in an untaxed jurisdiction.

    Maybe I’m missing something here, but I don’t see how any of the proposed “solutions” could touch a corporation that has no presence in the USA or Europe.

    I’m a real-stuff-you-can-hold-in-your-hand engineer, not a tax engineer, so this is out of my field. What I do know is that there are trillions of dollars at stake for those who can engineer a way to avoid corporate taxes — and that can buy a Hell of a lot of very clever thinking on ways to do it. A much, much higher budget than the pro-taxation parties can bring to the battle.

  2. Jill SH says:

    Is this a good time to bring up the financial transaction tax again, as a possible offset to the lowering of the corporate tax rate and/or some consideration of foreign profits? Somewhere along the line they have to move the money. Catch it in motion.

    • Jared Bernstein says:

      Yes! Great point.

    • D. C. Sessions says:

      I’m all for the FTT because it’s a first-order damper on the system — it’ll help a lot to keep it from being unstable. As a revenue raiser, though, it’s got the same problem that income taxes do: they prevent resources from moving in the economy to where they will be most productive.

      You don’t want to tax movement if you can help it. Sometimes (like with the income tax in the early-to-mid 20th century) it may not be what you want but it’s a lot more readily collected than a theoretically better system.

      IMHO (and I would love to see Our Gracious Host address this) we’d be vastly better off with a straight-up wealth tax. It could be flat as a pancake and still be the most progressive tax on the planet, by the way. But mostly because it taxes wealth regardless of whether it’s being used productively or just sitting around, and thus incents putting it to work.

      A 2% net wealth tax would replace both the corporate and personal income taxes in the USA; for other reasons we’re probably better keeping the payroll taxes (but with no cap.) Note that a wealth tax would result in an increase in interest rates, which is not altogether a bad thing, and indirectly act as a consumption tax (which I’m told economists love, although I’d love to have why explained.)

      BTW: technically, a wealth tax would be a zeroth-order system feedback. Income and FT taxes are first-order, and something that depended on acceleration of flows (windfall taxes?) would be second-order. Generally speaking, second order feedback is a Bad Thing.

  3. Tom Cantlon says:

    It would seem taxes should be based on some combination of the burden a company is, how much they use our infrastructure, and how much they make from sales to us. Ideally as you noted corporations are nationless and it would take an international tax agreement, but maybe this bypasses that. Worst case, if a company makes things here or otherwise uses the U.S. but sells overseas and maybe leaves the profits overseas, we would get no tax. So tax needs to somehow take into account the burden they are, the use of our roads, ports, defense of shipping lanes, etc. They may produce jobs which is a plus but some jobs pay so low employees are on Medicaid and food stamps so that being a plus is not a given. And some industries are dirty or otherwise a burden. Other worst case is a company ships goods here to sell and takes the profits home. That may incur sales tax but that’s it, and trade is good but still, tax needs to somehow take into account the profit they are making from us. The burden tax may be difficult to calculate but maybe between these two pieces would make up for the lack of corporate tax they pay. And any owners here who receive dividends or capital gains here can be taxed.

  4. Charles Jensen says:

    Since corporations don’t want to pay tax on the profits they generate as a result of their operations here in the US, why not put a small VAT of 2 or 3 percent to collect a tax up front for the privilege of selling their products in this country. I know VATs are regressive but this country needs the revenue to maintain the infrastructure, military, etc.