President Barack Obama’s proposal to tax the foreign earnings of U.S. companies to help pay for infrastructure projects is unlikely to be enacted without broader tax reform that also faces obstacles, according to investment bank Goldman Sachs.
The president’s fiscal 2016 budget seeks to end the current system that allows companies to defer taxes on profits made in foreign countries until they are repatriated. When those earnings are returned to the U.S., they are taxed at an average 39.1 percent for federal and state levies, minus a credit for foreign taxes paid.
Corporations such as Microsoft and Apple have billions of dollars parked in other countries where they've already paid taxes. In order to avoid double taxation, U.S. companies have kept an estimated $2 trillion in cash overseas.
The Obama budget would tax future foreign earnings at 19 percent, with a credit to offset any foreign tax paid. Goldman Sachs said the new tax plan is unlikely to be enacted without a wider group of changes to the tax code.
“Profit repatriation will only be politically viable if it is included in broader corporate tax reform legislation,” Alec Phillips, an analyst at Goldman Sachs, said in a February 3 report
obtained by Newsmax Finance. “While there is a political opening for tax reform legislation over the next several months, the likelihood that Congress will actually enact a corporate tax reform bill this year is still fairly low in our view.”
Goldman Sachs said corporate tax reform hasn't "better than a 25 percent probability of enactment this year” for several reasons.
First, small businesses and partnerships are likely to question the fairness of changes to the tax code. Since many of them pay at the individual rate, they would be at a disadvantage with corporations that benefit from lower taxes.
Second, the president and congressional Republicans have major disagreements on taxing income that already gets taxed in other countries.
“Where the White House proposes a 19 percent minimum tax rate on foreign income,” according to Goldman Sachs, “the tax reform proposal offered last year by the then-chairman of the Ways and Means Committee, Republican Rep. Dave Camp, would have taxed foreign income at just 1.25 percent.”
Finally, “the process of limiting tax preferences to lower the statutory corporate tax rate would create winners and losers,” which may be enough to hobble reform even if the president and congress agree on other policies.
The president’s plans for infrastructure spending would be limited without the taxes on profits brought home to the U.S., Goldman Sachs said. The government has had a financing gap of about $10 billion a year on transportation spending for the past several years.
“To make up this gap, Congress has transferred $45 billion in general tax revenue into the highway trust fund over the last six years,” according to Goldman Sachs. “Without broader corporate tax reform, profit repatriation is unlikely to produce the revenue lawmakers seek.”
The president also proposed a one-time tax of 14 percent on past foreign earnings that would target the estimated $2 trillion that U.S. companies have overseas.
Many corporations aren't enthusiastic about making them responsible for rebuilding U.S. infrastructure with profits earned in foreign countries, according to The Wall Street Journal.
Marty Regalia, chief economist for the U.S. Chamber of Commerce, said multinationals also don’t want another tax on overseas profits to become part of the tax code.
“I don’t expect our multinational companies to be all that excited about this,’’ Regalia said to the newspaper
. ”Companies in the past have not expressed a great deal of interest to go down this path.’’
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