On Wednesday the Obama administration proposed a long-awaited cut in the top rate of US corporate tax from 35 per cent to 28 per cent. But the White House also disclosed something more contentious. The administration is suggesting US companies’ foreign earnings should be subject to a “minimum tax”.
The current system for taxing earnings of foreign subsidiaries controlled by US companies is controversial and counterproductive. Such foreign earnings are theoretically taxed at a 35 per cent rate if brought back to the US, but not taxed at all by the US as long as these earnings are kept abroad.
Faced with this choice, US companies are unsurprisingly holding abroad more than $1.5tn in foreign profits. The current tax system thus discourages US companies from using their foreign profits to build facilities in the US or buy American companies. It also generates almost no tax revenues for the US Treasury.