Treasury Secretary Jack Lew appeared Thursday in front of the House Ways and Means Committee to testify about the Obama administration’s budget and corporate tax reform, and Republicans quickly peppered him with questions about the possibility of moving to a “territorial” tax system, favored by both the GOP and corporate lobbying groups, that would exempt most foreign profits from taxation.
Despite previous calls for generating revenue through corporate tax reform, the Obama budget calls for reform in a revenue-neutral manner. Obama has previously proposed a system that would institute a global minimum tax for corporations, which would exempt some profits but require that corporations pay a certain tax rate around the world. When Rep. Lynn Jenkins (R-KS) asked Lew if the administration was willing to move toward a territorial system, Lew said the administration still supported the global minimum reform but would “welcome a conversation” about how to reduce incentives for corporations to offshore profits and cost the United States needed revenue:
LEW: Congresswoman, I actually think the choice is not so stark as one or the other. Our system is a bit of hybrid already, and our proposal for the global minimum makes it more of a hybrid. We would welcome a conversation of how to set the dial in the right place so that it has the right incentives without losing revenue that we can’t afford to lose. I think there’s a solution in the middle here that if we work together in a bipartisan basis we can find.
Republicans and corporations often repeat the talking point that America has the highest corporate tax rate in the world, and while that is true for the nation’s 35 percent marginal rate, it doesn’t tell the entire story of American taxation. The U.S. collects less in corporate tax revenue as a percentage of GDP than all but one other industrialized country, and even as corporate profits hit a 60-year high in 2011, the effective corporate tax rate hit a 40-year low. Corporations haven’t paid an effective rate that equals the 35 percent top marginal rate in more than four decades.
Their tax burdens have dropped because corporations are stashing profits in overseas tax havens in record numbers. The largest companies have nearly $1.5 trillion in overseas tax havens, and they moved as much as $183 billion more overseas in 2012 alone. A full territorial system would almost surely increase those numbers by exempting foreign profits from taxation and costing the country valuable revenue and investment. A study of a territorial system found that it would increase offshoring and overseas investment and lead to the creation of 800,000 jobs overseas that could have otherwise been created in the United States. Those practices already have huge ramifications for Americans, as corporate tax dodging cost individual taxpayers $1,026 last year, according to a recent report. The territorial system Republicans and big corporations are seeking would only make those problems worse.