Obama launches a tax raid

The US administration presented its $4trn annual budget this week. One of the most controversial features was the president’s plan to mount a raid on US corporations’ foreign earnings. US firms currently pay little or no tax on their foreign earnings until they are brought back to America, where corporation tax is a comparatively high 35%.

The plan proposes a one-off, 14% tax on the $2trn American companies are keeping abroad, using the proceeds to fund $238bn in infrastructure spending. Future foreign earnings would then be taxed at 19%, regardless of whether they are brought back to the US or not. Moreover, US corporation tax should fall to 28% in the future, suggested the administration.

What the commentators said

It’s hard to see how this proposal would change two basic problems, as The Wall Street Journal pointed out: US firms’ tax competitiveness suffers because most other developed countries have far lower corporation tax rates – Britain’s is 21% – and furthermore don’t tax foreign earnings at all. American firms are discouraged from bringing money home to pay dividends or make investments.

Obama’s plan to tax new foreign earnings at a reduced rate implicitly recognises this, but should “follow this insight to its logical conclusion”, said bloombergview.com: just scrap taxes on foreign earnings altogether. US companies would then be on a level playing field with foreign competitors, and would “allocate more capital according to its best uses instead of its tax consequences”.

Some revenue would be foregone, but the money made from taxing foreign earnings is small compared to the effort required to collect the tax. Scrapping exemptions in the corporate tax code, which mean that many companies pay far less than the 35% headline rate, would more than make up the marginal loss.

The wider issue here is that the government wants to make up for the fact that the private sector isn’t investing, said Jeremy Warner in The Daily Telegraph. But that’s actually largely governments’ fault: on both sides of the Atlantic banking regulation has categorised infrastructure investment as high-risk, while capricious politicians create overall uncertainty by threatening clampdowns on certain sectors, as seen with the UK energy sector. Get set for more meddling and money grabs. “Having run the ship aground, politicians now demand to be put in charge of the bridge.”

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