The candidates for the Republican presidential nomination may be calling each other “losers” and “lightweights” and “robots” and “cheaters,” but there is at least one issue around which they share common ground — corporate tax reform. Though there are minor differences in specifics there is major agreement that many of the corporate tax rules and laws that date back to the 1960s need to be rewritten.
Given that control of Congress will likely remain with the Republicans after the November elections, a Republican in the White House would improve the chances for substantive tax reform considerably. (Not to take sides; but the Democrats’ focus has been on tax policies that would soak the rich, not make the country more competitive.) That means the United States would become more competitive compared to other nations. It could mean billions of dollars flowing back to the United States for investment and job growth. And it would remove the incentive for U.S. companies to relocate their headquarters to low-tax nations.
Some have estimated that U.S. multinational corporations are keeping almost $2 trillion in overseas accounts rather than bringing that money back to the United States. There are two reasons why: the exorbitant U.S. corporate tax rate and our government’s practice of taxing income earned outside of the United States.
Our 35% corporate tax rate is the highest of major industrial nations. It was set in the early 1960s at a time when tax rates of other nations were so high we looked cheap by comparison. But through the decades countries such as the United Kingdom, Canada, and Germany have all slashed their rates 10% to 15% lower than ours. Over the last 6 years almost 30 companies from Burger King to Eaton Corporation to Valeant Pharmaceuticals have moved their headquarters to other countries to take advantage of those lower rates, often through inversions in which they merge with a foreign company.
The second problem is that our government taxes income regardless of where a U.S. company earns it, while many other countries tax only what was earned within their borders. A subsidiary of a U.S. company in France, for example, pays a corporate tax to the French government on its profits. But if the parent company tries to bring those profits to the United States, it will be taxed an additional amount, depending on the difference between the French and the U.S. tax rates, even though none of that income was earned on U.S. soil.
In recent years Congress has approved a “look-through” rule on foreign earnings that provided a break to U.S. multinationals. It allowed them to move earnings around offshore without being subject to current U.S. tax under the anti-deferral rules, which taxes U.S. companies on earnings even before they receive an actual dividend distribution. But the look-through rule has been approved on a temporary basis, never permanent. The bigger problem remains. Our government taxes corporations anywhere on the globe that it can.
The Republican candidates have presented sensible fixes to these problems. To start they would slash the corporate tax rate. Donald Trump would cut it to 15% for all companies whether they are a Fortune 500 or a mom-and-pop shop. Ted Cruz has proposed a flat tax of 16%; John Kasich, 25%.
The idea of implementing a “territorial” tax system in which we only tax earnings within the United States is also popular among the Republicans. This would create an incentive for companies to bring home their overseas profits, invest them in operations in the U.S., and create more jobs. As for the estimated $2 trillion currently parked overseas, both Trump and Cruz propose a one-time repatriation of that cash at a 10% tax rate.
Proposing to not tax dividends under a territorial system is simply one step, but it is a big step because it solves many problems. Over the years there have been patches and additions made to the foreign tax credit system, making the foreign tax credit calculation and the whole system very complex. Adopting a territorial system and not taxing dividends would eliminate this morass of tax law in the international tax area.
On the other hand, none of these reforms are likely should a Democrat win the presidential election. Neither Hillary Clinton nor Bernard Sanders has presented a plan to revise corporate tax laws. Rather, both have talked about paying for infrastructure upgrades through corporate tax revenues and not about repatriation, cutting the rate, or reeling in our global reach.
Grown men running for our nation’s highest office can sound silly calling each other “jerks” or “pathetic.” Rather, it’s time they aimed their barbs at our corporate tax policy. “It’s a total disaster!” “It’s a joke!” “It’s a loser!” Okay. Now let’s fix it.
Douglas S. Stransky is a U.S. international tax partner for the law firm of Sullivan & Worcester in the firm’s Boston office.