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A Must-Read on Corporate Tax Reform

A new report by Reed College’s Kimberly A. Clausing for the Washington Center for Equitable Growth is a must-read for tax policymakers, who regularly hear from corporate lobbyists that they should eliminate taxes on foreign profits for the sake of U.S. multinationals’ “competitiveness” — which would tilt the tax system even more toward overseas investments.  Clausing’s report refutes this faulty notion.

Policymakers should focus, in particular, on five key takeaways from the report:

  • First, there’s scant evidence that U.S. multinational corporations are losing out to their global competitors.  In fact, Clausing observes, “profits as a share of U.S. gross domestic product during 2012-2014 were as high as any point since the 1960s.”
  • Second, U.S. multinationals are world leaders at avoiding taxes and particularly good at shifting their profits to overseas tax havens.  As this chart from the report shows, U.S. tax revenue losses from such shifting exceed $100 billion each year.
From Washington Center for Equitable Growth: Profit shifting and U.S. corporate tax policy reform
  • Third, much of the business community is lobbying for “territorial” taxation, under which U.S. companies would pay no taxes on foreign profits.  Clausing says such a system would “make a bad corporate tax base erosion problem worse.  Exempting foreign income from taxation altogether will turbocharge the already-large incentive to earn income in low-tax countries.”
  • Fourth, Clausing recommends that policymakers focus on reducing U.S. corporate profit shifting to foreign tax havens and suggests several ways to do so, including steps to halt the erosion of the corporate tax base, encourage U.S. corporations to bring profits from overseas back to the United States, and discourage U.S. corporations from moving their headquarters overseas.
  • Fifth and finally, Clausing notes the vital role that the corporate income tax plays in making the federal tax code progressive and in limiting high-income people’s ability to use corporations as tax shelters