House Ways and Means Committee Chairman David Camp (R-MI) today released his long-promised plan to overhaul the country’s corporate tax code. As he’s been hinting, the plan not only cuts the corporate income tax rate from 35 percent to 25 percent, but also implements what’s known as a “territorial system,” which exempts U.S. corporations from paying taxes on money they earn overseas.
Currently, U.S. corporations pay to the Treasury the difference between the tax rate of the country in which they earn money and the U.S. rate. (So money earned in a country where the rate is 25 percent would require a corporation to pay 10 percent — the difference between 35 percent and 25 percent — to the U.S.) However, corporations are allowed to defer paying their U.S. share of taxes until the bring the money back to the U.S., giving them every incentive to shift and keep money (and jobs) offshore.
Instead of fixing this problem, Camp’s plan to shift to a territorial system, as Citizens for Tax Justice explained, will make it even worse:
First, [under a territorial system] corporations would have a greater incentive to engage in profit-shifting, meaning practices used to disguise U.S. profits as foreign profits. A common example is the manipulation of transfer pricing to shift corporate profits into tax havens (countries that do not tax, or that barely tax, certain types of profits).
Second, corporations would have a greater incentive to shift actual operations — and jobs — to other countries.
Our current system already encourages these practices because U.S. corporations are allowed to “defer” their U.S. taxes on their offshore profits. But the incentives would be even greater under a territorial system, in which corporations would NEVER pay U.S. taxes on their offshore profits.
Camp said today during an interview that “the rest of the world has gone to a lower corporate rate and a territorial system of taxation. So our employers are really at a competitive disadvantage when they try to do business around the world.” However, governments with territorial systems are “having tremendous problems enforcing their existing international corporate tax rules, particularly the transfer pricing rules.” It’s such a problem, in fact, that “the European Union is considering moving away from the territorial system for determining how corporate profits are allocated among its member states.”
Camp has already proven that he is not concerned with actually having corporations pay taxes, saying that corporate tax dodging is all the more reason to cut the corporate tax rate. But U.S. corporations already pay the second-lowest taxes in the developed world and are sitting on record amounts of cash, so there’s little reason to slash their taxes any further.