US Corporate Tax Debate: the mosquito that can’t be killed

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USA company registrationWith large companies such as Apple exploiting loopholes in the corporate tax system, it seems strange that years of the US corporate tax debate still have not produced a robust corporate tax plan. Multinationals are increasingly shuffling their finances to their international subsidiaries to benefit from lower tax rates in other countries. Thus, these companies are able to avoid paying millions of dollars every year. It is estimated that there are trillions of dollars in offshore company accounts, protected from the US corporate tax requirement.

US Corporate Tax Debate: The flaw in the system

At the current 35% rate, corporate tax rates are still significantly lower than the 52% rate in the 1950s. Despite the decrease in corporate tax rates, companies exploit ambiguities in the system to protect their finances. The current system states that if the company’s profits are not repatriated to the US, the cash is not subjected to the 35% tax rate. Companies transfer cash within their international subsidiaries to benefit from tax havens such as Ireland and Luxembourg.

Mountains of cash overseas yet the citizens are suffering

With the lack of cash coming in from the corporations, a large portion of the federal government’s income comes from personal income and payroll taxes, thus allowing large corporations to continue with their debatable activities. Yet these corporations are hoping to repatriate the cash overseas, if the US government is willing to reduce the tax rates.

US Corporate Tax Debate: What are the options?

Some argue that if corporate tax rates are reduced overall, corporations will be willing to repatriate cash to the country, and thus will reduce the tax pressure on individuals. More income for the government will surely benefit the rest of the country – lower taxes, more local business opportunities and fewer pay cuts. However, with no solid proof of lasting benefits of reduced tax rates seen in the past, this argument has insufficient backing.

The government could, alternatively, stop taxing profits earned offshore or lower the tax rates on repatriated profits from 35%. This would make it easier for companies to reinvest profits from overseas into their home-base company, as companies such as Apple are still unwilling to bring in the billions of dollars held in offshore accounts until the tax rate is lowered.

So what should the government do?

It is easy to see that attempts in the past to reduce taxes overall have been insufficient in giving corporations the incentive to repatriate their cash. Perhaps it’s time to revisit President James Madison’s idea in 1787, which hints towards creating an established system that would cover all business activity of American companies operating in a multinational environment. This would include a range of different areas including corporate tax rates and business structures, thus creating an over-arching system to govern all multinational activity by American companies. With the nature of the existing debate on corporate taxes, one can only imagine how long a US corporate tax debate on a new system would last.

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