May 13, 2009
New Tax Foundation Special Report Examines Obama Corporate Tax Reform Proposal, Argues that Tax Competition Should Not be Confused with Tax Evasion
A new Tax Foundation report argues that the Obama Administration's proposal to end tax deferral for income earned abroad by American businesses is a step in the wrong direction.
The report is Tax Foundation Special Report No. 167, "Bank Secrecy, Tax Havens and International Tax Competition," by senior research fellow Robert Carroll, Ph.D.
Carroll acknowledges the need to target tax evasion, as the proposal does, but he argues that ending tax deferral is unrelated to bank secrecy or tax evasion and would put U.S.-based companies at a competitive disadvantage in their competition with multinational firms based in other major trading nations.
"Clearly, the U.S. should demand that taxpayers follow the law and pay legally owed taxes," Carroll says. "But lawmakers need to be careful not to confuse tax evasion with global tax competition."
According to Carroll, the real problem the U.S. faces is a tax system is increasingly out-of-line internationally. The U.S. has made no major change to its corporate tax in over 20 years, while other nations have continually lowered their rates and reformed their tax rules. The U.S. now has the second highest corporate tax rate, and by every other comparative measure, the U.S. corporate tax system is less hospitable than the tax systems of most other nations.
Regarding true tax havens, Carroll recounts the 1996 launching of the OECD's Harmful Tax Practice initiative. This campaign targeted nations that combined several tax strategies: preferential tax regimes for non-residents, zero or very low tax rates, a lack of transparency, and poor information exchange with other tax authorities. Most of the nations on the OECD list have amended their policies.
Some analysts have erroneously applied the tax-haven label to every nation that enacts a low tax rate.
"By no means is enactment of a low tax rate in itself a harmful tax practice," Carroll explains. "It is the low tax rate in combination with the other criteria - the lack of transparency, the lack of information exchange, and the presence of special tax regimes - that defines a tax haven. Normally, enacting a low tax rate is a legitimate way to expand a nation's tax base and increase the living standards of all residents."
Carroll cites Great Britain's experience. Many prominent businesses have left the U.K. for more friendly tax environments, and like the U.S., Great Britain has been imposing a worldwide tax system. But unlike the U.S., Great Britain's latest tax reform is competitive. The recently published government budget includes a dividend exemption for profits paid back to British multinational corporations from their foreign subsidiaries.
"Just as the U.K. is adapting to competitive pressures from abroad by reducing its corporate tax rate and making more generous the tax treatment of British foreign subsidiaries' profits, so the U.S. will hopefully realize that its multinationals will be better able to compete at home and abroad with similar changes," says Carroll.
Special Report No. 167 can be found at http://www.taxfoundation.org/publications/show/24696.html.
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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