WASHINGTON – Amid the tumult over looming tax hikes and spending cuts, a massive change to the corporate tax code is quietly gathering steam.
U.S. multinationals have spent years pushing for a reform of the tax code that would eliminate taxes on business profits overseas, just as these firms are banking their futures on growth abroad.
Now, with the debate over the country’s fiscal future in the spotlight, many executives, lobbyists and some on Capitol Hill are latching on to the “fiscal cliff” as a potential springboard for their cause.
To the companies, no other element of tax reform matters more.
They say that U.S. multinationals face a disadvantage against overseas competitors because, unlike many other developed countries, the IRS collects taxes on foreign income when it’s brought back into the United States. These companies argue that if that tax were eliminated, they would be more likely to bring their overseas earnings back to the United States. It’s estimated that U.S. multinationals are holding $1.7 trillion in earnings abroad, largely to avoid being taxed at a 35 percent rate.
“At least it will be here and not circulating in other countries,” said Erskine Bowles, co-chair of a prominent White House committee that was tasked with addressing the country’s debt. He supports eliminating taxes on foreign profits.
Some tax experts warn, however, that such a change could radically alter how companies behave and have broad implications for the U.S. economy. Without the right safeguards, they say, eliminating taxes on foreign profits and switching to what’s known as a “territorial” system would blow a hole in tax revenues, give multinationals more leeway to exploit tax havens and drive jobs overseas.
“The territorial tax system they envision would gut the entire U.S. corporate tax code,” said Edward Kleinbard, a professor of tax policy at the University of Southern California. “It would lose gigantic sums of money every year.”
Support for a territorial system has already appeared in a number of prominent places. It’s among the recommendations from both the National Commission on Fiscal Responsibility and Reform, co-chaired by Bowles and former senator Alan Simpson, and President Obama’s jobs council. It was part of presidential candidate Mitt Romney’s economic platform. And it has been a perennial on the wish lists of business groups like the Business Roundtable and the U.S. Chamber of Commerce, as well as many individual multinationals that are meeting with leaders in Washington this week.
So far, territorial tax reform has received little public attention in the fiscal cliff debate, as the Bush tax cuts that are scheduled to expire Dec. 31 don’t affect corporate tax rates.
But policymakers are deliberating a potential compromise that could be attached to a bigger overhaul of the tax code in 2013. And advocates are hoping for an ambitious version of that deal that would ensure corporate tax reform for income earned both at home and overseas.