U.S. companies are stockpiling a record amount of foreign earned profits abroad, roughly $2.1 trillion. The amount of cash held overseas by U.S. multinationals is up 93 percent since 2008. And Uncle Sam receives a near-zero return on foreign profits held overseas. This sad state of affairs is the ultimate result of a U.S. tax code so antiquated and perverse that it undermines America’s economic competitiveness.
The way the system works, foreign earnings are subject to a 35 percent U.S. tax, but that tax may be deferred indefinitely if a corporation chooses not to repatriate. In effect, corporations are incentivized to keep their money overseas, along with the jobs and operations that come with it. Everyone loses: the government, corporations, U.S. taxpayers and anyone with a 401(k).
Republican or Democrat, nobody in Washington denies the problem exists. The disagreement lies in the remedy. On the left, some want to end the deferral and levy an across-the-board tax of 25 or 30 percent on all corporate profits earned overseas. That solution may have worked at the turn of the last century, but it won’t today, when globalization has reduced the barriers that prevent a company from relocating. It would lead — and in too many cases already has led — to companies reincorporating abroad, a craven but fiduciarily responsible move.
On the right, there is general consensus that we should adopt a pure territorial system in which foreign profits are taxed only in the country where they are generated. Yet this would reduce tax revenues and create a race to the bottom.
, with companies gravitating to the places where tax rates are lowest. Meanwhile, the incentive for U.S.-based multinationals to book profits overseas will only increase, tax revenues will decline and the federal deficit will rise.
I’d be lying if I claimed to know an easy way out of this mess. What I do know is that every day the status quo persists, Americans stand to lose, and our competitiveness erodes: A 2013 report card issued by the American Society of Civil Engineers gave U.S. infrastructure a cumulative grade of D+ and pegged the investment needed to bring us up to par at $3.6 trillion. What’s more, the longer we wait to deal with our corporate tax system, the harder it also becomes to solve other endemic problems our nation faces, from an income gap to an education gap and a broken immigration system.