Does Corporate Tax Policy Discussion Need A New Approach?

Corporate tax policy should emphasize providing companies with proper incentives so they can focus on earning the highest pretax profits,

instead of producing the greatest after-tax profits, Josh Barro recently wrote in The New York Times.

Corporate hiring decisions

Barro, a NYT correspondent and former senior fellow for the Manhattan Institute for Policy Research, bemoaned the current emphasis that much of the current discourse places on policies that could motivate companies to move jobs overseas, noting that businesses make decisions on where to hire based on a wide range of variables.

“Employment is a macro issue; it’s not an issue of which particular company is investing where,” said Eric Toder, an institute fellow for Washington, D.C.-based think tank the Urban Institute and co-director of the Urban-Brookings Tax Policy Center, Barro noted. Foreign businesses’ investments in U.S. factories will probably make up for any incentive current fiscal policies give domestic companies to build manufacturing facilities overseas.

Global job creation

There is certainly evidence to support his point of view. While U.S. companies did move production overseas during the jobless recovery, foreign businesses also hired workers in the United States. For example, many major pharmaceutical companies – including Merck and Sanofi – are headquartered in other countries, and have hired research and development staff domestically.

Siemens has repeatedly earned the recognition of Pres​. Barack Obama for the investments it has made in the U.S., even though the company is “shipping jobs overseas” every time it provides capital for operations in the world’s largest economy, Barro emphasized. Since companies based both here and abroad are creating domestic and foreign employment, the corporate tax policy conversations are starting to stress revenue instead of jobs.

Obama’s tax on foreign earnings

This new focus was evident in Obama’s latest corporate tax policy proposals, which he unveiled at the State of the Union address in January. During the speech, he stated his desire to tax earnings held overseas at an instant, one-time rate of 19 percent.

Currently, companies are required to pay taxes on these profits when they are repatriated, but have the ability to hold them in foreign nations indefinitely. Under Obama’s proposal, domestic businesses with foreign operations would face the one-time levy on these unrepatriated earnings, but would in turn receive a tax credit worth 85 percent of the taxes paid to the overseas countries where they do business.

Territorial taxation

To simplify, companies would pay taxes in the nations where they generate income in the first place. As long as the country is not a tax haven, these businesses would not have an obligation to pay anything more to the U.S. government, Barro emphasized. This would be the case even if the foreign jurisdiction has a moderately lower tax rate than the U.S.

Members of both political parties back such territorial taxation, and the approach’s bipartisan support is notable, Barro emphasized.