The muddled road to overhauling US corporate taxes

Fixing a system most people agree is badly broken is no eask task

US Senator Carl Levin has introduced two bills aimed at preventing US firms from merging with a foreign company to avoid paying taxes. Photograph: Andrew Harrer/Bloomberg

US Senator Carl Levin has introduced two bills aimed at preventing US firms from merging with a foreign company to avoid paying taxes. Photograph: Andrew Harrer/Bloomberg

Fri, Aug 8, 2014, 01:30

Every loophole has its lover. That’s why, despite the furore that has erupted over American companies adopting foreign headquarters to reduce their taxes, it is proving so difficult to fix a corporate tax system that almost everyone agrees is badly broken.

Businesses complain that the high federal tax rate of 35 per cent on corporations is what propels them to exploit every opportunity to shave their tax bill. And Washington is listening: lowering that nominal rate in exchange for pruning the crop of special-interest deductions is a principle embraced by president Obama and Paul D Ryan, the Wisconsin Republican who is chairman of the house budget committee.

But the truth, explains Senator Carl Levin, the Michigan Democrat who has introduced two bills aimed at preventing American firms from merging with a foreign company to avoid paying taxes, is that “businesses all want to get rid of the other guy’s tax deductions – and reduce rates”.

To Senator Levin, Washington’s first priority should be what he labels “unjustified corporate tax loopholes”, deductions that he says do absolutely nothing to encourage economic productivity, but exist solely to reduce taxes.

Loopholes

Whether you agree that the government should subsidise gas exploration or encourage companies to invest in new machinery, Levin said, supporters can at least make a case that these deductions help the economy. Inversions, the label applied to the foreign takeovers that have captured the public’s attention partly because many Americans perceive them as unpatriotic, are mere tax dodges, he said.

With Capitol Hill stalemated, that flash of support has encouraged the Obama administration, with a push from congressional Democrats, to pursue a way to curb inversions without legislation.

But even on this issue, John A Boehner, the speaker of the house who has won Republican support to sue the president for supposedly circumventing Congress, warned the White House to work with lawmakers on ending the exodus of taxpaying corporations.

Inversions are just one of the loopholes that critics consider particularly egregious examples of gaming the system.

At the top of the list is the rule that allows American multinationals to avoid paying taxes on profits until they are brought back to the United States. Microsoft, Google and Abbott Labs, for example, have managed to escape taxes on billions of dollars in foreign profits that are nonetheless invested in United States Treasury bonds and other government securities.

The joint committee on taxation estimates that the exemption on profits that are supposedly vacationing abroad costs the federal government $50 billion a year, about 1.7 per cent of total revenue.

Those who believe corporations pay too much worry that the tax burden is putting American companies at a disadvantage in the world economy. “We’ve been down this road before, and we know companies will continue to do this as long as our tax rates remain the highest in the world,” representative David Camp, a Republican from Michigan and the chairman of the house ways and means committee, said.

Camp, who is retiring from Congress this year, spent three years drafting a sweeping tax overhaul that was vilified by members of both parties as soon as it was released in February.

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