Republicans Take New Tack on Taxing Companies’ Overseas Profits
Democrats are likely to object to the House GOP’s and Donald Trump’s plans for sharply lower rates
President Ronald Reagan once chided government’s approach to the economy as following this mantra: “If it moves, tax it.”
Today’s Republicans are following Mr. Reagan’s ideas by trying the exact opposite approach. The tax plans from House Republicans and presidential candidate Donald Trump stop aiming at the moving target of U.S. companies’ foreign profits.
Their plans would alter existing rules so thoroughly that companies would get little advantage from cross-border tax maneuvers they perfected over decades and move the U.S. toward taxing immobile parts of the economy.
Mr. Trump’s original tax plan would impose the same, immediate tax rate on corporate income no matter where it is earned. As he revamps his ideas, Mr. Trump is considering adopting the House plan.
That proposal would levy taxes based on the location of sales, which are harder to move than profits. Both proposals share roots with plans from Democratic-leaning groups, though Hillary Clinton has signaled her intent to toughen the existing system.
The U.S. now attempts to tax its companies on income they earn globally, trying to make corporations indifferent to investing domestically or abroad.
It doesn’t work that way in practice. Companies get foreign tax credits, so they aren’t double-taxed on overseas earnings. They don’t pay the residual U.S. tax until they repatriate the money. That gives U.S. companies incentives to book profits in low-tax countries, leave trillions of dollars there and borrow when they need cash.
As a result, the Internal Revenue Service chases corporate profits as they move briskly from country to country, generating disputes with U.S. companies such as Facebook Inc.,Microsoft Corp., Amazon.com Inc., and Coca-Cola Co.
There is no simple answer. If a company has California executives, North Carolina researchers, Irish patents, Chinese factories and customers everywhere, where is its profit earned?
Republicans long backed “territorial” tax proposals to make the U.S. more like the U.K., giving up U.S. claims on its companies’ foreign profits. The logic: Make sure U.S. companies don’t face a higher tax burden than their foreign competitors do.
But those plans put even more focus on the question of where income is earned. They either sap government revenue or require more baroque rules to protect the U.S. tax base.
The new Republican plans depart from past thinking, though they are still tax cuts that lower the burden on business and are territorial in the sense that they don’t tax foreign sales. As such, they are likely not acceptable to Democrats without major changes.
Mr. Trump’s original plan from 2015 called for lowering the corporate tax rate to 15% from 35% and, just like Democratic presidential candidate Bernie Sanders proposed, would stop companies from deferring U.S. taxes on foreign profits. U.S. companies would pay a 15% tax, whether they earn income at home, in a tax haven or in Germany, so there would be no benefit to shifting profits abroad.