Treasury’s overseas tax plan
The United States has a thing for big business, and we prove it by collecting corporate taxes at about half the rate as the rest of the developed world. According to OECD data from 2010 America collected corporate taxes equal to about 1.8% of GDP, or about half the 3.5% average for developed nations. Many have pointed out that in higher-tax nations governments provide national health care systems, relieving corporations of that major expense. This is an important economic distinction, although many U.S. corporations have signaled that they may abandon offering health coverage when Obamacare is up and running.
Although America is already in the lower tier of corporate tax collectors, the U.S. Treasury is floating a trial balloon about reducing or eliminating taxes that corporations pay on profits earned overseas, reports Damian Paletta and John D. McKinnon in the Wall Street Journal:
The Treasury Department is considering a proposal to eliminate some but not all taxes on the overseas profits of U.S. multinational companies, a central element of the administration’s broader plans to overhaul the corporate-tax code, according to two people familiar with the deliberations.
U.S. businesses have pushed hard to exempt all overseas earnings from U.S. taxes, claiming the current system puts them at a disadvantage to foreign competitors.
When U.S. corporations earn profits overseas, they are taxed by the local government; when the profits are brought back into the U.S. they are taxed domestically, and the corporation is given a credit for the amount paid to the foreign government. The Treasury proposal would eliminate the portion of taxes paid to the U.S. government.
If you dive down into the most recent press release from the Bureau of Economic Analysis, it’s easy to see why U.S. corporations would want overseas profits to escape taxation. From the National Income and Product Accounts GDP, 2Q 2011:
Profits from current production increased $57.3 billion in the second quarter.
The rest-of-the-world component of profits increased $27.1 billion in the second quarter.
About 47% of U.S. corporate profits in the 2nd quarter were earned overseas. It’s the overseas element of corporate profits that the U.S. Treasury Department is proposing to eliminate.
The Treasury proposal, whispered to sympathetic reporters through anonymous attribution, is anathema to liberals and unions who fear it would provide a massive economic incentive for U.S. corporations to move jobs overseas.
It’s easy to see how corporations, under the Treasury proposal, would be encouraged to move jobs and production to countries with lower tax rates. It would allow them to earn bigger profits and then flow those back to shareholders and management in the U.S. tax-free. Unfortunately the revenue collected by the Treasury would be diminished since capital gains and dividends are taxed at a much lower 15% rate.
The fiscal problems of the U.S. are enormous. I’m a little unclear why the government would consider lowering taxes on the overseas earnings of U.S. corporations unless it’s to appease a special-interest group. America needs jobs onshore and fiscal revenue. Giving companies tax breaks to produce offshore seems nonsensical.
Above: Chart displays OECD data of total corporate tax revenues as a percentage of GDP for developed nations