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A newly released study sponsored by General Electric and a corporate lobbying group argues in favor of a “territorial” tax system, which House Ways and Means chairman Dave Camp has proposed as part of comprehensive tax reform. Here’s Citizens for Tax Justice director Bob McIntyre’s take on the study.
General Electric and a corporate lobbying group called ACT have sponsored a “study” arguing that our economy would benefit from a “territorial” tax system — one that permanently exempts from U.S. taxes the offshore profits of American corporations. This flies in the face of overwhelming evidence that today many of these profits are really earned in the U.S. but characterized as “offshore” in order to obtain existing tax benefits that would be expanded under a territorial system. The “study” is hopelessly flawed for several reasons.
For starters, the long-term “improvement” in the U.S. economy that the report predicts is so small that it’s a rounding error. The authors claim that permanently exempting offshore corporate profits from tax would increase U.S. GDP by $22 billion a year. That’s an increase of only 0.1%. So even if one believed this would actually happen (we don’t), one wouldn’t care.
More fundamentally, the authors seem to believe that the trillions of dollars that multinational corporations claim they earn in tax havens are floating in baskets in the Caribbean, and are unavailable for use in the United States. But that’s not true. As we’ve learned from the annual reports of companies such as Apple, most of that money is actually invested in the United States, in the stock market, corporate bonds and government bonds. In other words, most of the money is already here. It just hasn’t been taxed.
The authors brush aside the problem that a permanent tax exemption for “foreign” profits would encourage American corporations to work even harder at making their U.S. profits appear to earned in other countries that don’t tax them. The authors simply assert that they don’t think a permanent exemption would be any worse than our current system of indefinite “deferral” of U.S. taxes on such profits. What they don’t mention, however, is that there is a straightforward way to fix our current system.
As CTJ and others have pointed out, the solution is to repeal “deferral” and make multinationals pay tax on their overseas profits, with a credit for taxes paid to foreign governments. This would make profit-shifting to tax havens useless, and would also end tax incentives to move operations abroad. As a bonus, ending “deferral” would reduce the federal budget deficit by over $500 billion over the next ten years, making it much easier to protect essential public programs such as Social Security and Medicare.
General Electric, one of America’s most notorious tax dodgers, wouldn’t like such a reform, of course. That’s probably why it’s never mentioned by the authors of the study.