Notwithstanding that the bulk of investors don’t know a lot about the impact of tax avoidance by U.S. multinational corporations, it’s a fact that offshore tax havens and tax loopholes have resulted in a lower effective tax rate for those companies relative to domestic companies.
As a result, the ratio of corporate tax revenues-to-GDP has remained fairly constant in recent years in spite of surge in profits.
Recently, there have been calls, in fact, to reduce the domestic U.S. corporate tax rate to improve U.S. competitiveness. The United States has the second-highest corporate tax rate among OECD countries, at 35 percent.
What the administration doesn’t quite get, yet, is that closing the loopholes, while keeping rates high, will just ensure slower growth and reduced tax income for the nation. Lower profits also will mean fewer new jobs are created.
Yesterday, the administration proposed these following measures to close tax loopholes for U.S. companies abroad and for offshore tax havens: Repeal the check-the-box rules and require certain foreign subsidiaries to be considered as separate corporations for U.S. tax purposes, expected to raise $86.5 billion in revenues between 2011and 2019. (Multinationals often create foreign subsidiaries in low-tax countries, for instance, to transfer their assets and borrow from such subsidiaries.) Companies will not be able to receive deductions on their U.S. tax returns supporting their offshore investments until they pay taxes on their offshore profits, expected to raise $60.1 billion. Close loopholes that allow U.S. companies to get tax credits for dollar-for-dollar taxes paid to foreign governments (figures that companies often artificially inflate), expected to yield $43 billion in revenues. Make the R&D tax credit permanent, providing a tax cut of $74.5 billion over 10 years for businesses that invest in innovation and research. Comprehensive package of disclosure and enforcement measures to make it more difficult for financial institutions and wealthy individuals to evade taxes by hiding money in offshore accounts. That would raise $8.7 billion. Also, to require foreign financial institutions that have dealings with the United States to share information about their U.S. customers
These measures are aimed at raising tax revenues, plugging the fiscal deficit, and limiting the off-shoring of American jobs. Another goal might be to encourage repatriation of profits of multinationals, which would boost domestic liquidity and support the dollar.
Implementation of these tax measures will start from 2011 after the tax measures under the fiscal stimulus plan are phased out. The administration plans to raise $210 billion in revenues via these measures in the 10 years starting 2011.
Of course, and we couldn’t expect anything else, corporate reaction has been a negative. Business interests complain that such measures would increase the corporate tax rate to the highest level since 1986 — thus the operating costs for U.S. companies — hurt international competitiveness.
They would also curtail growth of U.S. multinationals abroad and the extent of job creation abroad. By affecting the profitability of companies, even jobs within the United States will be at risk, business leaders warned.
In my opinion, the newly announced measures could raise the effective tax rate for the multinationals to above 20 percent, yet still remain below the 1993-94 level.
Nevertheless, investors should not overlook the fact that, as profits fade, the extent of tax revenue generation might end up being limited.
Reducing the current corporate tax rate from 35 percent while closing loopholes will help prevent tax avoidance by companies while keeping the tax revenues.
We’ll have to wait for a couple of years to see the results.
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