President Obama devoted his Saturday weekly address to hammer corporations which change their official residents to a foreign country to avoid American business taxes, which at $35 percent are the highest in the industrialized world. He suggested that solution to this problem is to remove tax loopholes and lower rates in order to make investment in the United States more attractive. According to a Friday story in the Economist the devil is in the details of the president’s call for “economic patriotism.”
The problem is that the Obama administration also proposes rules that tighten down on these so-called tax “inversions” in which an American company merges with a foreign company and then, for tax purposes, becomes a foreign company. The official White House page on business tax reform also has references to the so-called “Buffet Rule,” advanced by billionaire Warren Buffet that suggests that no household making more than $1 million should pay less of its share of income than a middle class household, usually an excuse for higher taxes on the rich.
The Economist noted that punitive measures in the president’s plan would do nothing to stem the flow of “economic refugees” from the United States to overseas. The solution is not only to lower business tax rates, which the president says should be 28 percent but others suggest should be lower, but also to remove the provision in the tax law that states the treasury collects taxes on business income no matter where in the world they are earned. The problem is that these taxes are only levied when the money is brought home to the United States.
This has set up a situation in which trillions of dollars are parked off shore, earning interest in foreign banks, unavailable for investment in the United States which the president says he favors. The president’s business tax reform plan does not address this problem. Indeed its preferred approach would involve writing new rules to make tax inversion schemes more difficult. However corporations pay consultants large amounts of money to find ways to get around such rules.
The preferred approach would be to lower tax rates and remove loopholes, as the president claims he wants, and to set up a territorial system of taxation. This means that only revenue earned in the United States would be taxed. This, according to most analysts, removes the incentives for businesses going overseas far more effectively than using regulations.