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Tax Reform Should Avoid the Global Minimum Tax

There is promise and peril in the GOP's corporate tax overhaul.

Dave Bredeson/DreamstimeDave Bredeson/DreamstimeIn a town where consensus is rare, an agreement has emerged among Republicans that the main goals of corporate tax reform are economic growth and increased competitiveness. The good news is that given that we have a terribly anti-growth and anti-competition tax system, a few changes would go a long way to achieving the objectives. But they would work only if the Trump administration and Republicans in Congress abandoned their counterproductive proposition of a global minimum tax.

First, let's do a little recap about our current system. The United States has a 35 percent corporate income tax rate. It's the highest of all industrialized countries. That means U.S. companies doing business at home or abroad always incur a much higher tax burden than foreign competitors.

We also have, unlike most other countries, a worldwide tax system—subjecting companies to taxation on all income, regardless of where it's earned. For example, the profits of U.S.-owned plants based in Germany are subject to U.S. taxes even though these profits have already been taxed by the German authorities. They do receive a credit for foreign income taxes paid, yet that still puts them at a competitive disadvantage.

The silver lining is that as long as companies keep their foreign earnings abroad, they don't have to pay the additional U.S. tax. This explains much of the $2.6 trillion in foreign-earned income stored abroad by American companies. While this protects companies from our punishing system, it also creates a disincentive to invest any of that money back into the United States.

The high tax rate and the worldwide tax system are big impediments to U.S. competitiveness in foreign markets and account for why, in the past two decades, a growing number of companies have decided to engage in corporate inversion, the practice of acquiring a foreign company and then relocating one's legal headquarters outside the United States for tax purposes.

I'm glad the Republican tax reform framework proposes lowering the corporate income tax rate to 20 percent and moving to a territorial tax system—one that doesn't tax foreign-earned income and doesn't penalize companies that want to bring that money back to the United States for investment. But as it happens, the framework also includes this sentence: "To prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations." That's bad news because it means the writers of the framework are ignoring research on the positive impact of lowering the corporate income tax rate on tax avoidance and instead are opting to smack an additional tax rate on foreign profit. If the rate is 15 percent, it means that any profit earned in a country with a lower rate would be taxed at a rate up to the 15 percent level.

One thing is clear: Territoriality with a global minimum tax would equal a full worldwide system because the current deferral protection would be effectively gone. Yet we're told not to worry because the rate would be so low that it wouldn't really matter. Not true. First, this bad fiscal policy would simply encourage companies to find ways to escape the system. Second, the minute Democrats are back in power, they could raise that rate, and companies could end up in a worse situation than the one they're already in. Besides, given that no one is serious about cutting spending, the pressure of future deficits almost guarantees that rate would go up.

They will also point to the word "global" in the framework, which means total worldwide income, as opposed to a country-by-country approach. That would arguably create slightly less disincentive to do business in low-tax places, such as Hong Kong and Bermuda. But why do we have to choose between a bad measure and a terrible one?

Good tax reform should be about enhancing competitiveness, which requires a low-rate and real territorial system. This sort of modified territoriality could quickly turn into a worldwide tax system without the protection of a deferral provision. That wouldn't be good, and it shouldn't be part of any reform agenda.

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  • Elias Fakaname||

    Let's just wait and see how bad congress can screw up tax reform. I have zero confidence in Ryan and McConnel.

  • BestUsedCarSales||

    It's a wonderous thing, there are so many things that could be done to improve it. I have no doubt they will manage to avoid every one of those things.

  • Citizen X - #6||

    It'll take great skill to avoid any of the myriad changes that would incrementally improve the tax code, but that's where the congressional GOP is a Viking, so we'll see.

  • CE||

    It gets a lot easier if you start with a spending cut.

  • ALWAYS RIGHT||

    Tax reform should have the goal of collecting enough money to pay for government spending. Rich people and corporations are the only ones who can afford to this burden.

  • Citizen X - #6||

    Which would mean that only rich people and corporations have a real interest in influencing policy, since they're the ones paying for it.

  • mpercy||

    Government shouldn't spend more than it takes in in taxes.

  • Last of the Shitlords||

    Actually, they can't. They don't make enough to cover $ 4 trillion per year, plus making up for the massive unfunded liabilities coming from medicare and SS.

    We don't have a revenue generation problem. We have a spending problem.

  • CE||

    They.

  • Sevo||

    ALWAYS RIGHT|10.12.17 @ 9:34AM|#
    "Tax reform should have the goal of collecting enough money to pay for government spending. Rich people and corporations are the only ones who can afford to this burden."

    Stupid people are the only ones to make such a stupid assertion.

  • Mark22||

    You can easily see who needs to be taxed in order to balance the budget in a US-style economy by looking at similar countries that actually balance the budget. What you find is that they tax "rich people and corporations" the same or less than we do, but tax the middle class considerably more.

    Average tax burden in Europe for middle class families is about 35%, compared to 25% in the US, progressivity is much faster, and in addition, sales taxes are 2-3x as high as in the US.

    So, your premise is wrong.

  • BestUsedCarSales||

    My fear is that changes like this will become increasingly common hear. This idea of a smaller piece of a larger pie seems to hold less and less sway. Also, people do not seem to really give too much of a shit about how non-governmental entities are doing. The health of the government and it's ability to give out entitlements is increasingly becoming the metric by which people judge the success of the country.

  • politicalmenace||

    Very good point. Your statement rings true especially as portions of Congress applaud Scandinavian countries as a virtue of success and use such terms as Democratic Socialism. They applaud them because they are nothing more than huge Nanny states that foster control. France is another country they applaud for their huge government footprint. I am sorry but I am not one to applaud dependency of government or praise one who recklessly spends and lectures us that tax cuts will hurt government revenue when they ignore spending.

  • p3orion||

    "The health of the government and it's ability to give out entitlements is increasingly becoming the metric by which people judge the success of the country."

    As with the obama administration patting itself on the back for the massive increase in welfare and food stamp use.

  • Domestic Dissident||

    But what about A.M. Links reform?

  • Citizen X - #6||

    Global Minimum Links NOW!

  • Rich||

  • Jerryskids||

    I believe "As The Swamp Kicks In" was the third track off Black Oak Arkansas' live album, FYTW.

  • Rhywun||

    But experts doubted such a windfall would flow to workers and said the GOP's planned changes to individual income tax rates would largely benefit the wealthiest Americans.

    Mark Mazur, director of the Tax Policy Center, said he was "incredibly skeptical" of the White House's $4,000 estimate, explaining that there are many reasons why wages have not kept up with the growth of corporate profits. He cited less powerful labor unions and competition from lower-wage workers abroad.

    *face-palm*

  • Mark22||

    You can "face palm" all you want, but he is right: countries like China don't have "labor unions" at all, and countries like Germany have "worker's councils" (even though they call them "labor unions"). Germany also doesn't have public sector unions and prohibits unionization in a large portion of its healthcare market.

  • Jerryskids||

    One nice thing about our worldwide taxing system is that US multinationals avoid repatriating their earnings and instead invest it in foreign enterprises. Since the US is by far the largest consumer market, all those foreign-made products then get to be imported into the US and everybody in DC loves imports.

  • sarcasmic||

    Dude, imports are bad. That is how we get a trade deficit: By buying foreign stuff. Ideally we would export all kinds of stuff to the world and import nothing. Then we would have all kinds of money from these foreigners buying our stuff. With all that money we would be rich. Far richer than if we used that money to buy stuff. Buying stuff makes us poor because then we don't have the money anymore. The richest people in the world are those homeless nutters with millions in the bank that you read about now and then. They don't waste their money on worthless stuff. They hoard their money. That makes them rich!

  • vek||

    LOL, but not really. A country, as with any individual, needs to balance their spending on current consumption versus investing for the future. Individuals in this country have under saved/invested for decades, and our nation as a whole has done the same. Being a net exporter is indeed good for building future net worth of the nation, just as it is for a person.

    It's the difference between being the penniless old person who has to depend on Social Security to not starve (spends everything, or even BORROWS to spend more than they bring in. Like our government does.), the average middle class person who spends plenty but also saves and invests some (like a country that's perhaps right around even on trade deficit), or the rich guy who spent enough to live well but invested very heavily (this is what China is doing now, and look at that growth!).

    As a country we don't need to be Scrooge McDuck, but it is very foolish to be the person who runs a massive negative balance forever. That's not how you build net worth. I'd say the middle path is the way to go in a perfect world. Problem is we're dicked by foreign protectionism, and our wages are just too high to compete in a lot of areas. As the poor countries get richer at least that will ease up.

  • John||

    Our tax system is insane. We go to all of these great lengths to create multinational corporations and get them to invest overseas and then create a tax system that ensures all of the profits made from these operations remain overseas and are never invested back into the United States. Our government punishes US corporations who use their overseas profits to in any way benefit people in the US.

    If you didn't know any better, you would think that the people who wrote the tax code were paid foreign agents sent here to destroy the country. In reality, our government is filled with small minded craven people who are too stupid, greedy and vindictive to understand what they are doing.

  • sarcasmic||

    They intend for corporations to bring all their income back to the country because that is what they are supposed to do, and then pay taxes on that income because they are supposed to. That's what the corporations are supposed to do. When they don't do what they are supposed to do, and keep that income overseas, they are thwarting the will of those well-intentioned people who write the tax code. It's not the fault of those who write the tax code, it's the fault of the corporations for being greedy and unpatriotic.

  • Last of the Shitlords||

    "In reality, our government is filled with small minded craven people who are too stupid, greedy and vindictive to understand what they are doing."

    Which brings us to the unpleasant subject of the likes of Tony, AmSoc, PB, Hazel, etc.. Assholes like them would tax corporations even more if they could. Since Big Corporations are meanies, or something.

  • Citizen X - #6||

    Are the links late because Robby is Robby, or because Britches doesn't give a fuck?

  • Fist of Etiquette||

    Weinstein had them shut down. One of the links was going to be about him. That's how powerful he is.

  • Citizen X - #6||

    He must have gotten word from his sleeper agent, shreek.

  • Rhywun||

    LOL he's defending Weinstein? He really has no shame.

  • Palin's Buttplug||

    HW is a jackass sexual harasser but he is not a topic for political purposes.

    Unless, of course, you're a conservative asshole type who uses him because you hate Hollywood, Democrats, Jews, and Disney.

    Oh yeah. Everything is political for TEAM RED!

  • John||

    Weisnsten never had anything to do with politics, except raising millions of dollars for the Democratic Party. I guess the Kochs are not a topic for political purposes either.

    You are the best comedy act on the internet shreek.

  • Palin's Buttplug||

    except raising millions of dollars for the Democratic Party

    That's right. And if he were a Republican you wouldn't mention him.

  • John||

    Democrats taking millions of dollars raised by a known serial rapist and Democratic agents working the press covering up the crimes of said serial rapist for decades is "not a topic for political purposes". You crack me up shreek. You really do.

  • Palin's Buttplug||

    Says the Denny Hastert supporter.

  • Rhywun||

    LOL. One of the kings of Hollywood, donator of millions to every Democrat in sight, most of whom are mum about the vile man they've been covering for for decades.

    Nothing political to see here at all.

  • Rhywun||

    And BTW, I changed my voter registration from Democrat to none about 15 years ago. I am not on "team red" and never have been.

  • Palin's Buttplug||

    I don't know what you are Rhywun|10.12.17 @ 10:07AM. The TEAM RED! conservative assholes stand out here (John, Rufus, Mikey, many others) - they are not the least bit libertarian.

    But those assholes VOTED for a serial rapist for POTUS.

  • L.G. Balzac||

    1993 or 1997?

  • Mark22||

    But those assholes VOTED for a serial rapist for POTUS.

    Well, at least we didn't vote for his spouse, who covered up his crimes and defended them in public.

  • politicalmenace||

    Team Red hates Jews? I thought it was the left who hate the idea of Israel and believe in the two state resolution. These guys are right in their comments about your comedic tirade especially with your last statement about everything is political with Team Red. As late night comic shows, award shows, NFL, etc have all gone political and I don't remember any of those groups being part of Team RED. LOL.

  • John||

    Weinstein is totally no big deal because some Republican Congressman, no one had heard of a week ago, had to resign because he asked his girlfriend to get an abortion. Seriously, he is claiming that asking your girlfriend to get an abortion is the same thing as being a serial rapist and the fact that some Republican did so means no one can say anything about Weinstein being a serial rapist.

    Shreek is more comedy act than troll these days.

  • Palin's Buttplug||

    Speaking of conservative asshole types - John is here.

  • John||

    I only come for the laughs shreek. God knows you supply them.

  • Uncle Jay||

    RE: Tax Reform Should Avoid the Global Minimum Tax
    There is promise and peril in the GOP's corporate tax overhaul.

    The US must reduce the corporate tax here in America which is one of the highest in the world, if not the highest, at about 37%.
    Eliminating the ancient and onerous Marxist progressive income tax and replacing it with a national sales tax would help also.
    Reducing spending will be an even better help to our economic health.

  • Johnimo||

    Finally, a "Reason" writer gets it correct AND makes the correct diagnosis. Excellent article, Veronique. Naturally, it would be even better if they just got rid of the corporate income tax in toto. Corporations would still have to pay the tax of the country of juridiction elsewhere, but in the USA they would not be requiring their customers to pay additional tax bills via higher prices of goods and services.

  • John B. Egan||

    Our on-paper corporate tax rate is not the highest of all developed nations...unless you consider the U.K., Denmark and France undeveloped nations.. : bit.ly/2xCaGd7
    Further that upper tax rate doesn't even consider tax cuts, credits and writeoffs, which places our corporate tax rate at an average of 19% and dropped to 17% recently.

    So are tax cuts, credits and writeoffs an uncompetitive burden? Nope. The whole point of writeoffs, etc is to encourage investment, upgrades, hiring, etc. That's because our tax system rewards companies to do so.

    Reagan removed many tax deductions that the consumer was able to use when he rewrote the tax code, and rewarded the wealthy and corporations whilke doing so. it appears that Trump and Mnuchin are willing to finish the job and remove the property tax deduction, while reducing the Corporate tax rate to 20%. The one thing nobody has mentioned yet is 'When the Corporate Rate is dropped to 20%, do they keep all their tax deductions as well, whle the citizens are stripped of theirs? That would in effect make the Corporate Tax Rate about 9%? Am I understanding that correctly?

    Individuals support our nation, while corporate taxes have slumped. Can you imagien wht this chart will look like if the corporate tax rate is cut in half? bit.ly/2gAdT78

  • Sevo||

    John B. Egan|10.12.17 @ 8:15PM|#
    Try that in English, please.
    If you are capable...

  • LifeStrategies||

    John B. Egan, the evidence does NOT support your assertion on business taxes, nor your position, see Dan Mitchell's 2017/10/11 post:

    http://danieljmitchell.wordpre.....ed-nation/

    "The President's defenders can argue, with some legitimacy, that he often makes that claim while talking about business taxation. In those cases, it's presumably obvious that "highest taxed" is a reference to corporate rates.

    "And if that's the case, looking at a second set of numbers, the President is spot on. The United States unambiguously has the highest corporate tax rate among developed nations. And the U.S. may even have the highest corporate rate in the entire world depending on how certain severance taxes in developing nations are categorized."

    See the image at:

    http://freedomandprosperity.or.....p-Rate.jpg

  • LifeStrategies||

    Absolutely! Eliminating FATCA is an important step to making America more competitive. Unfortunately, the tax on global income is adored by swamp creatures, they see it as a preliminary step to a world wide taxation system - and they're resisting abandoning it even though it would help make America great again. So we need to drain the swamp.

    On a related issue, is there any reason why President Trump cannot appoint all the new judges that the swamp are resisting as "recess appointments" - just as Obama did. Yes this was found not to be terribly legal, but it gave his appointments a couple of years to do immense damage. In a similar fashion, recess appointments of President Trump's judicial selections could give them a couple of years to help reverse Obama's damage...

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