Economic Scene: Obama tax hikes would not hit US multinationals hard

Many business leaders have come out against President Obama's plan to change tax rules regarding the foreign earnings of multinational corporations like IBM.

When President Obama asked Congress early this month to change the rules governing taxation of foreign earnings of United States corporations, business leaders thundered.

A “disastrous proposal,” charged John Engler, president of the National Association of Manufacturers in Washington.

It would “impede growth in the US economy,” said Marty Regalia, US Chamber of Commerce economist.

But if Congress goes along with Mr. Obama, don’t expect US multinational companies (MNCs) to wither away.

American companies actually enjoy relatively low real tax rates.

It’s true that the US has the second-highest corporate tax rate in the industrialized world, behind Japan, as Mr. Engler noted. That, though, is the top statutory tax rate – 35 percent. In fact, the US tax code offers so many deductions, credits, and other mechanisms by which corporations can reduce their tax burden that the actual percentage of profits they pay – the “effective” tax rate – is lower on average than that of other developed countries.

From 2000 to 2005, for example, US corporate tax revenues as a share of American gross domestic product, its total output of goods and services, averaged 2.2 percent, according to a US Treasury study. That compares with an average of 3.4 percent for the members of the Organization for Economic Cooperation and Development, the Paris-based club of industrial nations. Of those 18 nations, only Poland and Germany had lower corporate tax burdens. Most of these nations, however, don’t tax overseas earnings of their corporations.

In a way, corporations don’t really pay taxes. The tax burden of companies probably primarily falls on their owners, that is, their shareholders. Since ownership of corporate shares is concentrated among the well-to-do in the US, corporate taxation is “a key feature of a progressive tax code” – one that taxes upper incomes more than lower incomes, says Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a liberal Washington think tank.

The Obama proposal is milder than what he called for in his presidential campaign. It doesn’t tax all the deferred foreign earnings of US MNCs. In 2004, the latest data available, these companies paid about $16 billion in taxes on approximately $700 billion of foreign earnings. That’s an effective tax rate of 2.3 percent, a rate many American individual taxpayers could envy.

The MNCs claimed various deductions on their US tax returns for expenses supporting their overseas investments – such as interest on loans – but could defer taxes on their profits overseas. The US Treasury sees that as a tax advantage for investing and reinvesting overseas rather than at home.

Under Obama’s proposal, that advantage would go away in 2011, presumably after the world economy has recovered.

“It makes domestic activity more attractive,” says Joel Slemrod, an economist at the University of Michigan Business School in Ann Arbor.

The Obama tax proposal has more to it. It would curb tax havens for both corporations and individuals. It would make permanent a corporate tax credit for investing in research and experimentation.

The administration hopes this proposal and others to be put forward later in May will raise $210 billion over the next 10 years. Obama will need more than that in new revenues in the years ahead to restore better balance in a federal budget that has been bloated by stimulus spending, notes Mr. Marr.

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