The United States suffers from the highest corporate tax rate in the developed world: an appalling federal rate of 35%. Comparatively, the UK has a corporate tax rate of 21% and Ireland a mere 12.5%. This excessive taxation hinders domestic investment and job growth and encourages corporations to relocate overseas.
Under current U.S. tax policy, corporations can avoid paying taxes on foreign profits as long as the profits remain abroad. Hypothetically, if a Dallas-based U.S. manufacturing company decides to build a factory in Dublin all profits this company earns in Ireland would be taxed at Ireland’s 12.5% rate rather than the 35% American corporate tax rate. As long as these profits remain in Ireland, the IRS cannot impose any taxes on the firm. However, if this manufacturing company decides to fund a new factory in the U.S. with profits earned in Ireland, it must pay a penalty for bringing these funds back home. This residual tax is equal to the difference between the U.S. tax rate and the taxes the company paid to Ireland. For example, if (assuming this company is in the highest tax bracket) this company earns $10 million in Ireland, they end up paying $1.25 million to the Irish Government. In order to bring the $8.75 million back to the U.S. to fund a new factory, the firm would have to pay an additional $2.25 million to Uncle Sam. In other words, this company ends up paying the same $3.5 million in taxes on revenue earned abroad as they would if they earned it in the U.S. This residual tax acts as a disincentive for domestic investment and prevents job growth crucial to our lethargic economy.
According to a report released by a Senate subcommittee, the American manufacturing company Caterpillar has taken advantage of a lower tax rate in Switzerland. Over the past decade, Caterpillar has avoided paying $2.4 billion in taxes by keeping profits overseas. Similarly, Apple has $54.4 billion in accumulated foreign profit and General Electric surpasses all U.S. companies with about $110 billion in profits kept overseas. According to a Bloomberg report published last spring, U.S. multinational corporations stash over $1.95 trillion overseas.
By implementing a territorial tax system, U.S. firms can invest profits earned abroad in America with little to no penalty. Several other developed nations such as Australia, Canada, and the United Kingdom already have a type of territorial tax system. Implementation of a territorial tax system along with a lower corporate tax rate creates great potential for job growth and prevents corporate inversion. According to S&P Capital IQ’s Global Markets Intelligence research team, 35 U.S. companies have reincorporated overseas since 2009 in order to benefit from lower tax rates. Most recently, Burger King merged with Canadian restaurant chain Tim Hortons in order to move their headquarters to Canada to benefit from lower corporate taxes. The high corporate taxes of the Obama economy are curbing job growth and eroding the tax base.
Elizabeth Warren stated in her 2012 address to the Democratic National Convention: “Corporations are not people. People have hearts, they have kids, they get jobs, they get sick, they cry, they dance. […] That matters because we don’t run this country for corporations, we run it for people.” Last time I checked people with hearts, children, and the entire spectra of human emotion worked for corporations. It’s time to cut the “you didn’t build that” mantra and realize that when firms suffer, so do our American families, friends, neighbors, and patrons of elite liberal arts colleges.