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September 25, 2014

On the Wrong Side of Tax History

 

One of the trends foreseen by Alvin Toffler in his 1970 book Future Shock was the rise of the global multinational corporation. As corporations began doing substantial business overseas—indeed, as the sum of their overseas sales eclipsed their domestic sales—corporations would understandably begin to make investment decisions based on global rather than local factors.

And, as with all such change and disruption, societies adapt. The only question is whether they adapt with minimal or pervasive friction. In other words, will they embrace or fight the new reality?

Most developed countries have embraced business capital mobility by pursuing policies designed to attract investment. They’ve lowered corporate tax rates, moved to territorial tax systems, and otherwise streamlined tax compliance.

The notable exception has been the United States. Over several decades, the U.S. has become among the most inhospitable of the developed nations for business capital investment, because of our highest business tax rate among developed countries, our global tax system which insists on taxing even profits earned in other countries at the high U.S. rate, and our burdensome compliance regulations.

For years IPI has called for Congress to lower the corporate rate and move to a territorial tax system designed to make the U.S. once again an attractive location for business investment. Such calls have gone unheeded, despite the development of the most glaring symptom yet of our counterproductive tax system—corporate inversions.

In reaction to some companies that have purchased overseas companies in order to change their domicile and escape high U.S. tax rates on some income, the Obama administration this week decided to double-down on fighting rather than adapting to change. The Treasury Department issued new rules that, instead of making the U.S. more globally competitive, simply make the situation even worse.

Economist Martin Regalia of the U.S. Chamber of Commerce said “[T]he administration just assured that deferred income in the once foreign subsidiary will never come back to the U.S. to help create income, jobs, and economic growth here.”

According to Columbia Law School professor Michael Graetz, "perversely this may slow down efforts to fix the tax code . . . ."

President Obama is fond of telling other people that they are “on the wrong side of history.” Well, when it comes to policies that attract investment and create U.S. jobs, the Obama administration has chosen to dig in even deeper on the wrong side of tax history.  It’s little wonder this administration has presided over such an anemic economy.  For a president who claimed to be all about the future, he apparently can’t even see what was obvious in 1970.


 

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