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Corporate tax reform should benefit domestic companies

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As tax reform becomes a major focus in Washington, Congress faces a unique opportunity to fix a situation that has long favored multinational corporations at the expense of U.S. companies. Doing so could level the playing field for American companies while also delivering an extra $1 trillion in tax revenue over the next decade.

Currently, domestic American corporations are required to pay U.S. taxes on all of their worldwide income. In a rather unfair contrast, however, multinational firms are only required to pay taxes on foreign income after their profits are brought into the United States. Unfortunately, taxation on “foreign” profits can be avoided for decades because large companies can still use the money without appearing to return it to the U.S.

Michael Stumo

Michael Stumo

It works like this: A factory in Germany makes shoes. On route to the United States, the shoes pass through a financing subsidiary in the Cayman Islands. And then the shoes are insured via another branch of the company in the Isle of Man. Then another subsidiary in Bermuda arranges for shipment with a transportation company. And finally, the shoes are shipped for sale in the U.S. Each of these steps allows the parent company to strip away the appearance of profit in the U.S. by allocating earnings to subsidiaries in low-tax countries.

As Washington ponders tax reform, it’s time to focus on taxing the profits that corporations earn from the actual sale of their product inside America’s borders. This is the way that most U.S. states now assess taxes on corporate profits. And it’s a sensible system, since it would eliminate the ability of companies to hide taxable income via intermediaries in low-tax countries.

The idea of taxing U.S.-based sales — an approach often referred to as Sales Factor Apportionment (SFA) — has been gaining traction of late. It calculates a tax obligation based on the percentage of a company’s sales destined for customers in the United States. For example, a corporation sells 60 percent of its product to U.S. customers. If the company’s worldwide profit at year’s end comes to $1 billion, then $600 million (60 percent) would be taxed as U.S. income.

This “sales destination” approach would allow for a vast simplification of America’s corporate tax system, since taxable income would be determined solely by final sale in the U.S. None of the intermediate steps would be allowed to complicate or detract from the tax owed.

Multinational firms would be taxed the same as domestic U.S. companies because they could no longer hide their profits in tax haven countries. The various subsidiaries, branches, and partners used to obscure tax liability would all be considered part of the same overarching entity.

SFA could also improve America’s trade competitiveness, since domestic producers would only pay taxes on domestic sales, not exports. Conversely, foreign producers who sell goods and services in the U.S. would be required to pay taxes on their U.S. sales as the price of accessing America’s lucrative consumer market.

It’s estimated that in 2016 alone, profit-shifting through tax havens reduced U.S. corporate tax revenues by 34 percent. A destination-based tax would halt this hemorrhaging of much-needed revenues while allowing a reduction of the overall corporate tax rate

It’s time to end discrimination against domestic U.S. companies that play by the rules and don’t hide profits in tax havens. Taxing all companies based upon the profits from sales to U.S. consumers levels the playing field. Small and large corporations would all pay equally for the privilege of profiting from access to the U.S. market.

— Michael Stumo is CEO of the Coalition for a Prosperous America, a bipartisan, nonprofit organization representing the interests of 4.1 million households through its agricultural, Manufacturing and labor members.

3 comments

  1. Corporate tax savings of all types will result in stock buy-backs to raise stock prices and dividend payouts to demanding investors. Very little if any will go for making corporations here more competitive. Thanks, Mr. Prosperous America, for your ingenuous optimism regarding the true purpose of the “tax reform,” which is to pay back the very wealthy individuals, corporations, and investor groups whose elections the rich paid for.

    So obvious.

  2. PS A correction to my prior typo that needs it:

    “…the true purpose of the ‘tax reform’: to pay back the very wealthy individuals, corporations, lobbyists, and investor groups who paid for the Republican politicos’ election campaigns.” “You kiss my __, I’ll kiss yours.”

    So obvious.

  3. Great idea and explanation. This article makes clear ideas that I sort of knew. Mr. Stumo’s idea also solves the problem of all the corporate profits that are stored offshore, waiting for the next “repatriation tax break” to be brought back into the US. … Every nation has resources. One great resource we have is that of being the largest consumer-society in the world, and we should use that position to our advantage. Our methods of doing this, taxation, tariffs, have historically been used as currency manipulators, but more importantly as corporate profit tools, rather than as a way to benefit the US. This is because corporations buy elections and politicians. Until we change the system in which money wins elections, we will never get a taxation system that serves the US.

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