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Unpacking the Wall Street Journal’s Tax Article

Today’s Wall Street Journal looks at a reality facing major U.S.-headquartered multinationals and our economy -- namely, the U.S. tax system is a barrier to new jobs and investments here at home.  Given the significant attention Congress will give to tax reform, it’s important to give context to the Journal article.

The article focused on the fact that many U.S.-based global companies keep a significant amount of their foreign earnings in U.S. banks, and singled out Google, Microsoft, and EMC.  The focus on these companies veils the broader problem with the U.S. corporate tax code.  Namely, under current U.S. tax law, if these companies attempted to invest those earnings in domestic activities, they would have to pay a punitive rate that is higher than any other market in the world. 

Here’s why:  The U.S. is the only advanced economy that double-taxes locally-based global companies, including the three ITI members listed above.  The first tax is levied by the country in which a U.S. company generates its earnings, and then a second tax is levied if the company brings those dollars home to invest in new jobs and new facilities.  With the U.S. corporate tax rate significantly higher than the rates in many advanced economies, it creates a major barrier to reinvestment. 

In our view, and the view of a growing number of economists and bipartisan policymakers, the U.S. international tax rules are outdated and are not competitive with those of our major trading partners.  That is why we have urged Congress and the White House to break down this wall to reinvesting in the United States.

The Journal further suggested that, since U.S. multinational companies have large amounts of their foreign earnings in U.S. banks, those funds are not “languishing overseas” but are invested in the U.S. economy as domestic bank deposits.  The Journal implied that multinational companies skirt federal tax law by bringing revenues home through the banks, but not reporting them to the IRS. 

The reality is that the funds are padlocked, no matter if the bank holding those accounts is U.S.-based or not.  Foreign-earned funds cannot be invested in American jobs or facilities without facing the double-tax from the U.S. government, period.  It’s another example of how current tax policy gives American business bizarre choices.  Almost every major competitor based outside the U.S. does not face this bizarre system.  They can invest their earnings in their domestic operations without facing heavy taxes.

Fundamentally, the Journal article failed to put the current U.S. tax system in a broader context. The U.S. corporate tax rate is incredibly high – the highest in the world.  It has been basically the same rate since 1986, when it was one of the lowest rates among developed countries.  Since then, every major economy other than the U.S. has reduced their corporate rates, and the result has been an increase in economic growth and job creation.   Our own economy would greatly benefit from a lower rate.  Economists have noted that a rate cut from the current 35 percent to 25 percent will create an estimated 581,000 U.S. jobs each year for the next ten years.

The U.S. tax code is a barrier to reinvestment here at home.  It is a broken, outdated system that has fallen behind the rest of the world.  A reform blueprint that responsibly lowers the business tax rate and eliminates the double-tax on U.S. companies’ foreign earnings would be a major boost for the U.S. economy.  Shifting to a competitive, market-based system where companies’ overseas earnings are taxed once -- where they’re earned -- would be a major economic boost here at home.  American companies with operations at home and abroad are responsible for 63 million U.S. jobs.  Eliminating the U.S. double-tax would spark critical new investments and hiring, and build on these companies’ record of success.

Public Policy Tags: Tax Policy