The US Government is anxiously trying to balance the budget by cutting social programs while missing out on billions of lost tax revenue due to legalized tax loopholes. There is something fundamentally wrong with this picture. In a report published by the Robert McIntyre, Director at the Citizens for Tax Justice, McIntyre argues that reformation of the current taxation law regarding international business operations could potentially provide the government with a substantial increase of tax revenue while also removing incentives for corporations to move jobs oversees.
The report addresses two viable options for the US government to consider: a Territorial system and a Pure Worldwide system. The Territorial system mandates taxation of profits only “if they are generated in the United States.” This could allow businesses to conduct business abroad and avoid taxation of profits entirely. The main argument for this type of system states that US based corporations need to be more competitive with foreign corporations located in countries with lower tax rates. This allows the US corporation to maximize shareholder wealth, attract more investors, and thus, create new jobs with the newly acquired capital.
In contrast, the Pure Worldwide option mandates that all profits, regardless of whether they are generated on US soil or abroad, are taxed at US rates. However, the option does not eliminate the foreign tax credit, which aims to cancel the effects of double taxation the corporation may face. This option attempts to remove the incentive to move jobs offshore and provides additional tax revenue without an increase in the corporate tax rate.
Currently, the US adopts a hybrid of the two options. All profits of a US corporation are subjected to tax however; this rule is undermined by “allowing taxes on offshore profits to be ‘deferred’ until those profits are brought back to the US. (Repatriated)” Yet, according to McIntyre, “these offshore profits are never repatriated.” These profits never face taxation. Additionally, corporations find strategies to effectively reduce their US taxable income to a minimal amount by paying “fees” to these offshore subsidiaries, which sometimes have the sole function of a deposit box.
McIntyre continues to argue the case for a Pure Worldwide taxation system by citing evidence of potential tax revenue loss if the Territorial system is adopted. Essentially, the argument boils down to whether US corporations are willing to pay their share of taxes after decades of deregulation and corporate tax cuts since the 1980s. Corporate lobbyists have effectively battered down any attempt of a tax increase by utilizing economic “terror” tactics against the people of the United States. These “terror” tactics include the placing fear in the hearts of American citizens by suggesting that higher taxes will lead to less jobs and high unemployment.
The economic theory of the “invisible hand” is starting to wither away and prove itself inadequate to address our current global situation. Corporations are raking in record profits while thousands of Americans struggle for employment. We need to strive to achieve a more balanced society. McIntyre suggests that a Pure Worldwide tax system would greatly benefit the American people without any mention of a tax rate increase. It is essentially one step towards that goal.