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FOLLOW THE MONEY

Should the US change its tax system to bring untaxed profits abroad home?

The biggest questions facing our state — and our planet — need answers.

Golden Gate University Professor John McWilliams looks at new options for taxing American corporations abroad.

One of the most pressing issues in the next decade is finding a solution to the federal deficit. One way to bridge the gap is a $60 billion-a-year revenue stream that could be coming in, but isn’t. That’s the amount of corporate income taxes that would be generated for the United States if US corporations overseas were paying the US tax rate.

“The design of the current system provides incentives to shift income outside of the United States,” tax consultant and GGU Professor John McWilliams says. “The possibility of a US tax when foreign earnings are returned to the US causes funds to be reinvested offshore rather than in the United States.”

Today’s federal tax system, when combined with state and local corporate taxes, has a rate that can reach 39 percent — higher than any of the other 34 member countries of the OECD. US firms are using tax-planning techniques to report income and expenses in countries with low taxes — thus reducing their tax liability at home. The current system has led companies to stockpile more than $1 trillion in untaxed profits outside the United States — and some policymakers are looking at ways to bring that money back home.

One option would be to move closer to a worldwide system that limits or eliminates deferral of US taxes on income earned abroad. Another proposal would be to move toward a territorial system that exempts foreign income from domestic corporate taxation. Separate but related discussions are focused on changing the law to allow a lower tax cost for the reinvestment in the United States of previously untaxed foreign earnings.

“In the global economy of the 21st century, a tax system that allows some the of most successful US corporations to pay little or no federal income tax is not politically defendable,” McWilliams maintains. “The challenge is to accomplish change that allows US-based businesses to compete internationally and to encourage reinvestment in the US economy, creating jobs.”

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John G. McWilliams Professor
John G. McWilliams

JD, CPA

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