The United States has one of the highest corporate tax rates in the world. With the size of our economy it is hard to believe that we tax our entrepreneurs so much more than in other countries such as China, Brazil, and Israel. But because businesses today are so global, there is more choice on where a company can operate and where they can keep their profits.
A growing problem is that profits made overseas don’t always come back to the United States. Since 2004, over $1 trillion of U.S. corporate profits are sitting in overseas bank accounts or have been invested in overseas assets such as real estate. Many of these companies desperately want to bring this money back to the U.S. to invest here at home, but the 35 percent corporate tax keeps them from bringing that capital back to our country. For these businesses it makes more sense to leave the money overseas until there is some incentive for them to do otherwise.
In Washington, the debate is intensifying on what the federal government should do to bring these profits home. There are two basic approaches. The first is to allow what is known as ‘repatriation’ of these overseas profits. This would mean a temporary corporate tax holiday to provide an incentive to bring the $1 trillion back to our economy so it could be used for creating jobs, investing in research and development, building plants, and purchasing equipment.
Some look at this as a privately-funded stimulus plan. The way it would work is that corporations would pay a temporary 5 percent tax on this money instead of the 35 percent corporate tax. That tax break would expire after 1-2 years but the federal government would collect $50 billion.
The second approach is to make sure the assets don’t accumulate overseas in the first place. One proposal before Congress permanently reduces the corporate tax rate to 25 percent and moves to a “territorial-based” tax system for overseas income. This means permanently exempting 95 percent of overseas earnings from U.S. taxation when profits are brought back to the United States from a foreign subsidiary.
This is no easy task, however. This week the Joint Committee on Taxation said that even if all corporate tax loopholes were closed it would only permit the tax rate to be lowered to 28 percent without the federal government losing revenue.
What we do know is that something must be done and soon. Our foreign competitors are actively reforming their domestic and international tax codes. Countries such as the United Kingdom, Canada, and Germany, have recently lowered their tax rates to spur job creation and economic growth. Yet, America is sitting on the sidelines doing nothing. The United States cannot sit back and watch jobs go overseas because our tax system is stuck in the past.