US companies have long decried America’s system of worldwide taxation. More than $2tn in US profits are parked offshore to avoid paying taxes at home. Companies such as Apple, General Electric and Pfizer are among the worst offenders. In an ideal world, America would follow most other countries and adopt a territorial system.
This week’s proposal by President Barack Obama to impose a one-off 14 per cent tax on the current stockpile of overseas US earnings and move to a permanent 19 per cent tax on future income, offers a middle way between the two. By allowing companies to deduct in credits what they have already paid overseas, would avoid the injustice of double taxation. At the same time, it would bypass the pitfalls of double non-taxation in a world riddled with offshore tax havens. On its merits — and given the state of US politics — Mr Obama’s proposal strikes a reasonable balance.
But it will only work if it is part of a package. In his 2016 budget, Mr Obama proposes to reduce US domestic corporate tax from 35 per cent to 28 per cent, and to a lower rate of 25 per cent for manufacturing companies. The latter needlessly complicates what is supposedly a move to simplify and broaden the US corporate tax base. That apart, the principle is good. It will stand or fall, however, on whether Congress has the gumption to ensure the system is also purged of its myriad exemptions. The point is to simplify as well as lower. On the foreign side, US corporations would pay 19 per cent on future earnings with a foreign credit against what they had already paid to other jurisdictions. In an ideal world, that rate would equal the domestic one. But it is close enough to be workable. Mr Obama’s one-off 14 per cent tax applies only to past earnings.