“One of the most insidious tax loopholes out there” just got a little smaller. But President Barack Obama, who announced the change Tuesday with much fanfare, didn’t go nearly far enough: The tax code itself, not just its loopholes, is
“One of the most insidious tax loopholes out there” just got a little smaller. But President Barack Obama, who announced the change Tuesday with much fanfare, didn’t go nearly far enough: The tax code itself, not just its loopholes, is what needs fixing.
It’s hard to overstate just how bad the U.S. corporate tax code is. Imagine it was designed by foreign saboteurs — and prepare to be impressed by their ingenuity.
It taxes profits at 35 percent, one of the highest rates in the world. This excessive rate applies to a base riddled with exemptions and exceptions. U.S. companies pay taxes on their non-U.S. earnings, but only when the money is brought home, thus creating an incentive to park profits abroad. In these and other ways, the system manages to combine maximum economic damage with relatively meager revenue collection.
To avoid this tax, some U.S. companies bought smaller foreign firms and switched their residence for tax purposes overseas. These are the so-called inversions that new Treasury rules are intended to block.
A sensible tax system would eliminate the incentives for inversions and for parking income abroad. Actions such as the administration’s shouldn’t be confused with reform.
In fact, they make the code even more complicated when it desperately needs to be simpler.
There are two basic approaches to fixing the system. The less radical option would be to set a lower, internationally competitive tax rate and then apply it to a broader, simpler base.
The more radical option would be to abolish corporate taxes altogether, and treat business income as just another form of personal income — taxing it not at the company level, but as ordinary income when passed on to investors. This approach might seem far-fetched, but it’s worth considering.
Obama needs to settle on one of these approaches. The first is closer to what his administration already proposed, and even has some appeal in the Republican-controlled Congress. Now, all the administration needs to do is pursue the cause with the same zeal it brings to criticizing businesses for lawfully trying to reduce their tax liabilities.
— Bloomberg View
