How to fix the corporate tax system – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From The Boston Globe

With Europe in disarray after Brexit, US lawmakers should fix the nation’s broken system for taxing foreign profits of US corporations.

In theory, foreign profits of US corporations are subject to a US tax of 35 percent. But in practice, these profits are not taxed at all by the United States — unless they are brought back to the states. Because of this rule, US multinationals have kept abroad over $2.5 trillion of their foreign profits.

This huge sum could be a growth engine for the American economy. The money could be used to build factories, modernize infrastructure, or pay dividends in the United States. Instead, it is deposited in bank accounts or invested in foreign countries.

We clearly need to reform this system, but responses in the past have not had much success.

Most Republicans argue for a territorial tax system in which foreign profits would be taxed only where they are earned. But this unfortunately won’t work. US multinationals have become very adept at shifting their earnings to tax havens, such as Bermuda, and other low-tax jurisdictions, such as Singapore.

Thus, if Congress adopted a true territorial system for taxing foreign profits of US multinationals, these companies could easily move more facilities and jobs out of the United States to low tax jurisdictions. Then they could use their foreign profits to distribute higher dividends without paying any US corporate taxes on these profits. In short, the adoption of a territorial tax system would be disastrous for our economy.

On the other hand, Congress should not simply keep the 35 percent rate on foreign profits of US corporations, while stopping them from deferring US taxes on these profits. That combination would prevent US multinationals from competing on a level playing field with their foreign counterparts. When the average corporate tax rate is 24 percent for the association of industrialized countries, the United States is left scrambling.

Read the full post at The Boston Globe.

Bob Pozen is a Senior Lecturer at the MIT Sloan School of Management.

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