President Obama’s proposal to tax the overseas earnings of corporations at a one-time rate of 14 percent, followed by a permanent 19 percent, is at once recognition of a major problem and a failure to go far enough.
It still needs a major reworking to turn it into a vehicle encouraging corporate investment at home, which is what any such reform should become.
The president’s plan at least recognizes that the current policy of trying to tax overseas earnings at the domestic rate of 35 percent is counterproductive. Since that rate — which is applied to overseas earnings when they are brought home after adjusting for what was paid abroad — is higher than corporate taxes in virtually every other developed nation, U.S. firms just keep their earnings parked overseas. Both 14 percent and 19 percent are a good deal more palatable than 35 percent.
But the Obama proposal would apply the 19 percent rate on future overseas earnings regardless of whether they are repatriated, which amounts to a major tax hike. And if enacted, the plan could put many U.S. corporations at an even greater competitive disadvantage when operating abroad than they already find themselves today. That’s because foreign companies supplying similar products would be paying much less in taxes.
Moreover, U.S. tech and health care firms are among the biggest foreign earners, so the tax would hit hardest on dynamic sectors of the economy.
American firms currently hold a staggering $2.1 trillion overseas, . The simplest and fairest way to entice some of this money to the U.S. would be to adopt the system embraced by our trading partners: tax profits where they are earned. Then companies could deploy capital based upon where investments make sense and not worry about double taxation.
Even a 14 percent tax rate on foreign earnings could cost companies such as Apple $10 billion. It’s hard to see how that sort of fiscal blow could improve the ability of U.S. companies to compete in the international arena.
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