Opinion

Lawrence Summers

A simple fix for the divisive U.S. corporate tax debate

Lawrence Summers
Jul 8, 2013 11:20 UTC

No one is satisfied with the U.S. corporate tax system. From one perspective the main problem is that at a time when corporate profits are extraordinarily high relative to GDP, tax collections are very low relative to GDP. And many very successful companies pay little or nothing in taxes at a time when the budget deficit is a major concern and when hundreds of thousands of defense workers are being furloughed and lotteries are being held to determine which children Head Start can no longer afford to help. From another perspective, the main problem is that the United States has a higher corporate tax rate than any other major country and, unlike other countries, it imposes severe taxes on income earned outside its borders. Many argue that this unfairly burdens companies engaged in international competition, discourages the repatriation of profits earned abroad, and–because of the patterns of investment that result–benefits foreign workers at the expense of their counterparts.

These two perspectives on corporate taxes seem to point in opposite directions with respect to reform. The former perspective points towards the desirability of raising revenues by closing loopholes, whereas the latter perspective seems to call for a reduction in corporate tax burdens. Little wonder, then, that corporate tax reform debates are so divisive. Many can get behind the idea of “broadening the base and lowering the rate,” but consensus tends to collapse when the issue becomes the means to broaden the base. Indeed a principal objective of many business-oriented reformers seems to be narrowing the corporate tax base by reducing the taxation of foreign earnings through movement to a territorial system.

Where then should the debate go? Despite the tension between the critical perspectives on corporate tax reform, the current debate has landed us in so perverse a place that win-win reform is easy to achieve. The center of the issue is the taxation of global companies. Under current law U.S. companies are taxed on their foreign profits (with a credit for taxes paid to other governments) only when they repatriate these profits to the United States. Right now U.S. companies are holding nearly $2 trillion in cash abroad.  The companies argue, with some validity, that current rules burden them by making it expensive to bring money home without raising much revenue for the government because it has no claim against foreign profits that are not repatriated. They hope for and call for relief arguing that it will help them bring money home at a minimum for the benefit of their shareholders and possibly to increase investment.

The debate continues. The companies make their point while others rail against the idea that companies who have used what could politely be called aggressive accounting practices to locate income in low-tax jurisdictions should be given further relief. In the meantime, what is a corporate treasurer to do? With the possibility of some kind of relief looming, there is every reason to delay repatriating earnings to the United States even if the company has no good use for the cash abroad. And so the debate encourages exactly what everyone can agree should be avoided — corporate cash kept abroad to the detriment of companies and to no benefit for the American fisc.

A homely example makes the problem clear. Imagine a library where many books have been borrowed and are long overdue. There is a case for an amnesty to bring the books back and move on. There is a case for saying that rules are rules and fines must be paid. But the worst strategy is to keep indicating that an amnesty may come soon without ever introducing it. Yet something very similar is where we are in our corporate tax debate.

How to target untaxed wealth

Lawrence Summers
Dec 17, 2012 12:39 UTC

Sooner or later the American tax code will be reformed — probably sooner. Raising revenue will be the main motivation, but at a time of sharply increasing economic polarization, issues of fairness will be prominent too. There are also legitimate concerns about the complexity of current tax rules and their adverse effects on the economy.

So far, the debate has focused on scaling back provisions of the tax code that have favored activities traditionally deemed to be valuable. For example, there is talk of reducing deductions for charitable contributions, taxes paid to state and local governments, home mortgages, employer-provided health insurance and many less important provisions.

There are reasonable arguments to be made in each case. But taking only the “limit tax incentives” approach to tax reform has several major defects. First, if reform is designed to avoid perverse outcomes — such as the crushing of charitable contributions or more pressure on state budgets — then it will raise limited amounts of revenue. Second, this approach will address very little of the complexity in the code and is not likely to do much for recovery, since it will do little to increase demand. Third, it will do little to address concerns about fairness: The richest taxpayers actually make relatively little use of deductions and credits.

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