Obama and GOP: What's holding up corporate tax reform?
Obama and GOP leaders are in agreement on many corporate tax reform policies. But on the question of how foreign earnings of U.S.-basedmultinationals should be taxed, the gap remains wide.
At first glance, it looked like President Obama and congressional Republicans were miraculously headed in the same direction on corporate tax reform.
Howard Gleckman is a resident fellow at The Urban-Brookings Tax Policy Center, the author of Caring for Our Parents, and former senior correspondent in the Washington bureau of Business Week. (http://taxvox.taxpolicycenter.org)
Reform plans by Obama andGOP leaders such as House Ways & Means Committee Dave Camp (R-MI) seemedsimpatico. Both sides embraced lower rates. Both endorsed ending business tax subsidies, through neither had much to say about which ones. But on one fundamental issue the gap between Obama and the GOP remains wide.
How would theytax foreign earnings of U.S.-based multinationals? Both sides agree that the current system is the worst of all worlds: It is immensely complicated, wildly distorts economic decisions, and collectslittle revenue.
But when it comes to the solution, Obama and the Republicans seem headeddowndifferent roads. Obama wants to force U.S. companies to pay more tax on their overseas profits.Many Republicans would exempt offshore earnings from U.S. tax liability.
To understand where reformers are headed, think about todays system. Under our current worldwide structure, foreign subsidiaries of U.S.-based firms must pay U.S. tax no matter where they earn their income. To prevent profitsfrom being taxed twice,those firms get a credit against their U.S. tax for the levies they pay to other countries.
Those foreign tax rates are nearly always lower than in the U.S.But because U.S. rates are relatively high, companies game the system to avoid domestic levies on their overseas income, and even to reduce U.S. tax ondomestic income.
Under a practice known as deferral, U.S. firms dont pay U.S. tax until they bring their profits home. This allows them to reinvest earnings in foreign subsidiaries and, in effect, never pay those high U.S.rates.
Firms also use sophisticated accounting gimmicks to shuffle income to low-rate countries while shifting deductible expenses back home, where they can offset domestic profits and lower theiroverall U.S. tax liability. Sometimes, they actually move their productionand their jobsoverseas to avoid U.S. tax (though thats rarely the most commonreason).
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Obama and GOP: What's holding up corporate tax reform?