Curious Capitalist

Should Businesses Pay Taxes on Foreign Earnings?

In 2013 businesses will push for new tax laws that allow them to keep all their earnings made overseas.

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Ever hear of a Double Irish? How about a Dutch sandwich? These aren’t cocktails or bar snacks but rather complex financial strategies used by many American companies to dodge taxes on overseas earnings. There has been little debate about corporate taxes during all the fiscal cliff hoopla, but I expect this issue to go on the front burner this year, as businesses lobby for lower rates on earnings made abroad. There’s a lot at stake here – by some estimates, companies are holding $1.7 trillion in profits outside the U.S.

There are two proposals being discussed in Washington – one, a temporary tax holiday for American businesses, which would allow them to bring back overseas profits at a low tax rate of around 5% percent, versus the 35% they pay now. Companies say they’d put that money to good use investing at home and creating jobs in the U.S. Longer term, they’d like to see the U.S. move to a territorial system, which would mean that foreign earnings would be tax-free.

(MORE: Why the Fiscal Cliff Deal Should Have Included Social Security)

But while this plan might well goose the stock market, it won’t create more jobs at home – in fact, it might even do the opposite. We know this because we tried it back in 2004, when Congress enacted a temporary tax holiday on foreign earnings at the rate of 5.25%. Firms brought money back – some $362 billion—but most of it went not to capital investments or new business development but dividend payments and stock buybacks. JP Morgan estimates that the same thing would happen this time around, and that the resulting stock boost would be similar to another round of Fed quantitativeeasing. No wonder everyone is so excited.

There are things we could do to improve the corporate tax code – but allowing foreign earnings back into the U.S. at low rates or with no tax isn’t one of them. To read more about the issue, and how we should solve it, check out my latest Curious Capitalist column in this week’s Time Magazine.

1 comments
NancyG
NancyG

Trillion-Dollar Homecoming? What about the millions and billions of corporate profits that are never coming back? There is no homecoming, no repatriation of profits when it is the US subsidiaries of FOREIGN multinational corporations that are shifted to offshore to affiliated subsidiaries in foreign tax havens. When will the press stop writing about US based corporations and start writing about all multinational corporations - no matter what country they call home? Why are so many foreign based multinational corporations operating in the US? Can you name one that is reporting TAXABLE profits in the US and paying federal and state corporate income taxes? If corporate income taxes are so in the US, why are so many foreign corporations here? There are not many you say. Guess again and visit www.ofii.org.