Reality Check: When It Comes to Tax Claims, Marketplace Needs an Audit

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In a report that would have made Casablanca’s Captain Renault blush, this morning’s Marketplace Morning Report discovered the “shocking” news that U.S.-headquartered multinational companies keep their foreign earnings in foreign markets, and by doing so, they are able to defer any U.S. taxes on those earnings until it is invested in the U.S. 

This isn’t new -- tax deferral been a feature of U.S. tax law since Congress created the corporate income tax in 1913. What Marketplace failed to note is that tax deferral on foreign earnings was put in place in part to put U.S. companies on a level playing field with their foreign competitors.  Even President John Kennedy supported maintaining tax deferral when the U.S. Congress rewrote the international tax rules in 1962 because it was essential to preserve U.S. competitiveness. 

In an interview this morning, Marketplace took an easy, simplistic road, concluding (wrongly) that U.S.-headquartered multinational firms are failing to pay what is fair in U.S taxes, even if what they are paying is legally allowed.  But that faulty analysis misses two fundamental points:  First, every U.S. taxpayer, whether it is a single person or a single corporation, strives to pay the lowest tax bill allowable under the law.  Second, U.S. corporations have the added incentive to pay the legal minimum amount because to do otherwise puts them at a competitive disadvantage vis-a-vis their foreign competitors.  To pay more than the minimum amount is taking money away from a company’s workers and shareholders, and likely handing business and jobs to their foreign competitors.  

Here’s a look at the interview with host David Brancaccio and reporter Matt Drange of the Center for Investigative Reporting.

 

Drange:  A lot of the companies that are based here in the Valley have foreign subsidiaries in Bermuda, in Ireland, in the Cayman Islands -- all over the world.  And, if they decide for tax purposes that some of their assets are deemed ‘permanently reinvested’ -- that’s the jargon word overseas -- they don’t have to pay any U.S. taxes on that money until they bring it back to the U.S.

 

Fact:  There is no question that today’s outdated U.S. tax system forces companies to make numerous complex decisions to reduce their tax to the lowest amount required by law.  Here’s a big reason why:  Unlike almost all of their foreign competition, U.S.-based companies are exposed to double taxation on their foreign earnings -- first, they are taxed where the earnings are generated, and second,  they are taxed on those same earnings if they are returned to the U.S. -- eliminating any incentive to bring those dollars home for investment. 

The report also ignores that the tech sector has long sought to reform our antiquated code and has proffered solutions to invest in the U.S. the stunning $1.7 trillion in foreign earnings held by U.S.-anchored companies (tech and non-tech).

Shifting to a competitive, market-based system where companies’ overseas earnings are taxed once where they’re earned -- a system similar to what almost every modern economy uses -- would be a major economic boost here at home.  American companies with operations at home and abroad are responsible for 63 million U.S. jobs.  Eliminating the U.S. double-tax would spark critical new investments and hiring, and build on these companies’ record of success.

 

Brancaccio:  You can look at it different ways, right?  How much did they save?  Or how much did the U.S. Treasury lose?

Drange:  Right, right.  You can.  There’s (sic) a couple of different estimates.  Not all the companies actually report in their SEC filings how much the U.S. Treasury would gain if they were to bring this money back.  So of the 50 we looked at, only 17 reported that.  And, of that 17, that amounted to about $26 billion that U.S. Treasury get tomorrow, theoretically, if that money was brought back at the full federal tax rate which is 35 percent. 

 

Fact:  Mr. Drange seems to suggest that if U.S. companies were no longer allowed to defer taxes on their foreign earnings, the U.S. Treasury would gain billions in revenue.  As if it were that simple.  If Congress were to simply repeal deferral, U.S.-based companies would be totally exposed to double-taxation of their earnings, creating a competitive disadvantage with most foreign companies.  This disadvantage could be eliminated if the U.S. company moved its headquarters operations to another country that does not tax the foreign earnings of its domestic companies.

So, yes, repealing tax deferral is likely to benefit a government treasury, but it won’t be the U.S. Treasury.

Yes, let’s have a discussion about the tax code -- one that creates jobs, not punishes success.  The tax debate should be about luring new investment and new companies into the U.S., not about squeezing every penny possible out of America’s companies.  A competitive, market-based tax system would level the global playing field, encourage new investments here at home, and spark America’s economic engine to create jobs and drive innovation forward.

 

Drange:  I got some employees and some former employees who said, “You know what?  Sure this is all perfectly legal – no one is disputing that.  But maybe some folks in Congress like Carl Levin ought to fix these loopholes.”

 
Fact:  Tax deferral is a century-old feature of U.S. tax law designed to help companies compete.  With so many countries today having market-based tax systems and lower corporate rates, the current system does not best align U.S. company competitiveness with U.S. economic growth.

So rather than dabble in simplistic accounting theories, it’s time we engaged in smart economic realities.  If the goal is to generate more revenue for the U.S. Treasury, let’s align U.S. economic growth with U.S. company competitiveness. To align fully and successfully its tax and economic policies, our nation’s international tax system should encourage U.S.-based multinational companies to invest their foreign earnings in the domestic economy and put more people to work within our own borders.  That’s not what’s happening today.  The current U.S. international tax system imposes high taxes on our global economic champions if they seek to invest their foreign earnings in the U.S. 

We are long overdue for the U.S. to create its own competitive, market-based tax system that advances both U.S.-based global companies and the U.S. economy.  Such a system would encourage U.S. companies to bring home their estimated $1.7 trillion in foreign earnings currently sitting in overseas accounts.  It also would open the doors to new investments in domestic innovation, research and development, and manufacturing.

While many of the policy answers to solve the nation’s debt and deficit challenges and to provide renewed strength to the American economy will be debated and decided in Washington during the next few weeks, the long-run answer to our nation’s fiscal health rests in the creativity and ingenuity of America’s entrepreneurs and innovators.  Let’s reform our broken tax system and put them to work again.

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