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Citizens for Tax Justice - repeal “deferral,” stop corporations offshoring jobs


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Jan 17, 2010
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New Jersey
America’s tax system may cause its companies to move jobs overseas, but not in the ways many people think.

Some corporate leaders claim that the U.S. corporate tax rate of 35 percent forces them to do business outside the U.S. But that is the statutory rate. The effective tax rate on corporate profits is much lower because corporations enjoy so many tax loopholes.

These loopholes include special deductions that allegedly encourage “manufacturing” but go towards activities like producing hamburgers for fast-food restaurants, writing software, and extracting oil. They also include breaks allowing companies to write off equipment far sooner than it actually wears out, manipulate inventory accounting, and “defer” U.S. taxes on offshore profits.

As a result, corporate taxes as a percentage of gross domestic product (GDP) are lower in the U.S. than in almost any other country in the Organization for Economic Cooperation and Development (OECD), the industrialized countries that we compete with.

In any event, there is little evidence that taxes are an important factor for a company deciding whether or not to invest and hire people in America. Just as U.S. corporations must decide which countries to invest in, they also must decide which states within the U.S. to invest in, and research from the Corporation for Enterprise Development (CFED) has found that companies locate in a state because of its education, health care, and infrastructure and not because of its tax policies. The same is certainly true for federal corporate taxes.

However, one feature of our tax system really does encourage corporations to ship jobs overseas and shift profits to offshore tax havens: the break allowing corporations to “defer” U.S. taxes on profits they earn (or allegedly earn) in other countries until those profits are brought back to the U.S. (until those profits are “repatriated”). Often, those offshore profits are never repatriated.

Deferral causes two problems. The first problem is that deferral may give an American corporation an incentive to move operations and jobs to an overseas subsidiary. Because the U.S. does not tax profits generated offshore (unless the profits are repatriated), corporations can pay less in taxes by moving production to a country with lower corporate income taxes.

The second problem is that deferral creates an incentive for American corporations to disguise their U.S. profits as “foreign” profits. They do this by engaging in transactions that shift their profits to subsidiaries in countries that tax the profits lightly or not at all (countries that serve as corporate tax havens).

U.S. corporations would have even greater incentives to move jobs and profits overseas if Congress followed the wishes of many corporate leaders and enacted a “territorial” system, which would exempt the offshore profits of U.S. corporations completely from U.S. taxes.

A better solution is to repeal “deferral,” as President Kennedy proposed back in the 1960s. Corporations would then have little or no tax incentive to move jobs offshore or to shift profits offshore to tax havens, because the U.S. would tax profits of American corporations no matter where they are generated.

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