Saturday, July 26, 2014
In President Obama's Weekly Address for July 26, 2014, President Obama addressed the trend of corporate tax inversion. Describing it as corporations renouncing their U.S. citizenship, countries are incorporating in other countries even though most of their operations are still in the United States to avoid paying corporate income taxes in the United States. The problem this presents to the U.S. economy is that profits will be stashed overseas and not in the United States. Profits will remain there to avoid paying taxes, resulting in the U.S. to miss out on economic development and job creation.
Obama said that the way to “level the playing field” is to lower the corporate tax rate, close “wasteful” loopholes, and simplify the tax code. Lowering the corporate tax rate is a step in the right direction. The problem with closing the “loophole” is companies that are willing to relocate overseas will find ways around the loophole including moving more of their operations and jobs overseas if that is what it takes. It'll just chase more companies and jobs overseas. Simplifying the tax code requires a lot of untangling.
What we need to do is create a tax environment that encourages potential defecting corporations to stay. The most effective way to do that is to pass the FairTax proposal. The FairTax proposal (H.R. 25) repeals income taxes not only for corporations but also individuals and replace the revenue with a consumption tax. With corporate income taxes no more, global companies would be able to freely move their overseas profits to the U.S. tax free, thus injecting money into the U.S. economy without borrowing from China. The more money borrowed in the U.S., the more money spent in the U.S., the more jobs created in the U.S.
For more information about the FairTax, visit the official FairTax website at http://www.fairtax.org.
Two blog posts ago, I reported that corporations are defecting to countries with lower corporate tax rates than the U.S. and hoarding assets overseas to avoid paying taxes to Uncle Sam through acquisitions of companies in those countries. Among those tax haven countries are Ireland, Great Britain, and the Netherlands. The trend has risen so much that that law firms in those countries are now promoting their services to American corporations to perform the legal work to make the inversions happen.
When these inversions happen, profits are hoarded in these tax haven countries. These profits are then reinvested in these countries and not in the United States. Should these companies divert any profits to the U.S., the companies face corporate income tax consequences. Therefore, these companies are keeping the profits out of the U.S. As a result, jobs are being created elsewhere and not in the U.S.
The FairTax does not tax income, which means no tax on repatriated profits. If we have the FairTax, U.S. companies wouldn't have to look overseas for tax havens. In fact, the U.S. would become a tax haven for foreign companies. As a tax haven, foreign companies would find it advantageous to move investments and operations to the U.S., thus creating jobs. Since that's not happening, the U.S. is losing out on potential economic expansion.