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Addressing the Economic Club of New York on Monday, Republican House Speaker John Boehner told reporters that Congress should be “looking seriously at a territorial tax code,” according to CQ Today.
Under a territorial system, the offshore profits of a U.S. corporation would be exempt from U.S. taxes.
A recent report from Citizens for Tax Justice explained that this would cause serious problems.
First, corporations would have a greater incentive to engage in profit-shifting, meaning practices used to disguise U.S. profits as foreign profits. A common example is the manipulation of transfer pricing to shift corporate profits into tax havens (countries that do not tax, or that barely tax, certain types of profits).
Second, corporations would have a greater incentive to shift actual operations — and jobs — to other countries.
Our current system already encourages these practices because U.S. corporations are allowed to “defer” their U.S. taxes on their offshore profits. But the incentives would be even greater under a territorial system, in which corporations would NEVER pay U.S. taxes on their offshore profits.
Other countries that have adopted territorial tax systems are experiencing these problems, and the European Union is considering adoption of a different system to allocate profits among EU member states.
As CTJ’s report explains, the best alternative would be for Congress to repeal the rule allowing U.S. corporations to “defer” their U.S. taxes on offshore profits. Corporations could continue to get a credit for any taxes paid to a foreign government (just as they do now) which prevents any profits from being taxed more than once.
Possible Amnesty for Corporate Tax Dodgers
Some corporate leaders have argued that if Congress does not permanently exempt their offshore profits, then lawmakers should temporarily exempt them with the sort of tax holiday for repatriated corporate profits that Congress enacted in 2004. Boehner expressed openness to this idea on Monday.
Several studies of the 2004 effort showed the repatriated profits went to shareholders and not to job-creation, despite the promises made by corporate lobbyists. An economist with the U.S. Chamber of Commerce recently admitted that any attempt by Congress to attach job-creation requirements to the tax holiday simply will not work.
Calls for Slashing Public Services, But No Revenue Increase from Profitable Corporations
Speaker Boehner also said that the corporate tax should be reformed but should not raise any more revenue than it does today. This came during a speech in which Boehner demanded that “trillions” be cut from public services — a goal that would be impossible without sharply cutting Social Security, Medicare, and Medicaid — but refused to consider any revenue increases.
A recent report from CTJ explains why corporate tax reform should be “revenue-positive,” meaning we should raise more tax revenue from corporations than we do today.
Almost two-hundred organizations have signed onto a letter urging Congress to adopt a revenue-positive corporate tax reform.
The letter notes that a 2007 report from President Bush’s Treasury Department found that the share of profits paid in taxes is lower for U.S. corporations than the average for OECD countries.
Sign your organization onto the letter urging Congress to raise revenue by reforming the corporate tax. (Deadline: End of Friday)
Send a letter on your own behalf urging Congress to raise revenue by reforming the corporate tax.