The arcane, outdated and inefficient U.S. corporate tax code is costing our country jobs, factories, industries and tens of billions of dollars of badly-needed tax revenue each year.
Our tax system is supposedly based on the idea that U.S. companies should pay taxes on all profits, no matter where they are earned. Yet this is undermined when companies are allowed to “defer” taxes on profits made in other countries until those funds are repatriated to the United States.
This loophole encourages multinational corporations to move production and intellectual property, such as patents and trademarks, out of the country. Or they juggle their books to make it appear that a major portion of their income is made outside the United States. Then they keep it abroad, expecting to persuade legislators to give them “tax holidays” that allow them to repatriate the funds with minimal tax consequences. (The last holiday in 2004 offered a 5.25 percent tax rate). This set of incentives has resulted in up to $2 trillion of profits staying out of the country to defer taxation. This amount grows every year.
Many across the political spectrum are calling for reform. The left emphasizes doing something about the lost revenue and jobs. The right wants rate reductions. What if there is one reform that gives the left and the right what they want, while also improving our international competitiveness?
California’s “sales-based” corporate income tax could be a model for this reform. Passed by 61 percent of voters in a November 2012 state referendum, Proposition 39 requires a “single sales factor” corporate income tax. Corporate tax collections are predicted to increase by about $700 million per year.