US multinational corporations currently pay no US tax on their routine foreign profits, and half the statutory rate (minus a foreign tax credit) on their residual foreign profits.[i] This makes investment in foreign operations relatively less expensive and incentivizes shifting profits to tax havens.
The No Tax Breaks for Outsourcing Act (H.R.1711 / S.780) will create US jobs and raise revenue by:
- Applying the statutory rate on all foreign profits, and
- Strengthening provisions against US corporations inverting into foreign corporations.[ii]
Why is Equalizing Rates Needed?
Equalizing rates will create US jobs. US multinational corporations currently get a tax break on their investments in low-tax countries. Worse, they can even get a tax break by investing in high-tax countries and shifting their profits to tax havens. That is an America Last policy.[iii] To raise a given revenue goal, this bill will allow for a lower corporate tax rate on domestic profits and help create more American jobs.
Equalizing rates will raise revenue: Our country faces many needs, from infrastructure to childcare, that require additional revenue. Consider:
- IRS data show that US multinationals book 41% of their foreign profits in just 10 tax havens.[iv]
- Offshore profit-shifting by U.S. multinationals is estimated to cost American taxpayers between $432[v] and $710[vi] billion over ten years, and foreign taxpayers an additional $200 billion.[vii]
Equalizing rates will level the playing field for small businesses: When multinationals use accounting tricks to shift their profits to tax havens, other taxpayers like small businesses and consumers pick up the tab. This bill will help reverse the trend of the tax burden shifting from corporations to other taxpayers.
Equalizing rates will help restore public trust: Repeated scandals like the Panama and Paradise Papers[viii] have raised public awareness and anger regarding corporate tax dodging. By ending incentives for US corporations to abuse tax havens, this bill will improve public trust in the tax system.
Q & A
Will equalizing rates harm US competitiveness? No, it will improve the competitiveness of the United States as a destination of investment and make the American worker more competitive.
Will equalizing rates induce US corporations to invert into foreign corporations? No, under this bill, inverted corporations will continue to pay US tax like domestic corporations as long as they are 50% owned by Americans or managed and controlled in the United States.
Didn’t the Tax Cuts and Jobs Act end tax havens abuse? No, the Congressional Budget Office and an academic study project the TCJA will only cut profit shifting by, respectively, about 20% or 14%.[ix]
[i] Routine profits are defined as a return of up to 10% on tangible assets. Residual profits are actual profits minus routine profits. The foreign tax credit is 80% of foreign taxes paid worldwide.
[ii] The bill includes further provisions: ending the exemption for foreign profits of extractive industries; raising the foreign tax credit to 100%; ending the tax break known as Foreign Derived Intangible Income; limiting deduction of interests.
[iv] Internal Revenue Service, “Table 1A: Country-by-Country Report (Form 8975): Tax Jurisdiction Information (Schedule A: Part I) by Major Geographic Region and Selected Tax Jurisdiction, Tax Year 2017”, https://bit.ly/3dEQfmi.
[v] Kimberly Clausing, Emmanuel Saez and Gabriel Zucman, “Ending Corporate Tax Avoidance and Tax Competition: A Plan to Collect the Tax Deficit of Multinationals”, August 17, 2020, https://bit.ly/3mneQQD.
[vi] Gordon B. Mermin, Janet Holtzblatt, Surachai Khitatrakun, Chenxi Lu, Thornton Matheson, and Jeffrey Rohaly, “An Updated Analysis of Former Vice President Biden’s Tax Proposals,” Tax Policy Center, October 15, 2020, p. 4, https://tpc.io/35o1vzR.
[vii] Kimberly Clausing, Emmanuel Saez and Gabriel Zucman, “Ending Corporate Tax Avoidance and Tax Competition: A Plan to Collect the Tax Deficit of Multinationals”, August 17, 2020, https://bit.ly/3mneQQD.
[ix] Congressional Budget Office, “The Budget and Economic Outlook: 2018 to 2028”, April 2018, https://www.cbo.gov/publication/53651; Kimberly Clausing, “Profit Shifting Before and After the Tax Cuts and Jobs Act”, January 20, 2020, http://bit.ly/Clausing2020b.