Here’s a helpful illustration. Microsoft, a company that symbolizes American innovation, is now holding $108 billion of its profits overseas. Just sitting there.
“What’s keeping Microsoft’s cash abroad is the U.S. tax code.” That, according to a Bloomberg News story that describes a serious and growing obstacle for our economy.
It’s well known that the U.S.’s high corporate tax rate makes us less competitive with other nations. But another deep flaw in our system is also weighing down our economy, keeping out trillions of dollars that could boost investment and jobs in the United States, not to mention provide a windfall to the Treasury. It’s our “worldwide” system of taxation, and it creates a big, costly lockout effect.
First, Microsoft is hardly alone. More than $2 trillion dollars of U.S. capital—profits earned by American companies doing business overseas—is currently parked outside our borders. Many companies want to bring this money back to the U.S. to invest here. But there’s a problem. Doing so would sock them with a huge U.S. tax bill, so they opt to keep it elsewhere. This isn’t just about tax avoidance. It’s a uniquely American problem stemming from our particular—and screwy—tax treatment of profits earned abroad.
You see, nearly every industrialized nation only taxes companies on the profits they make within the borders of that country. The U.S., on the other hand, taxes companies without regard for where money is earned, requiring that they pay our full corporate tax rate—35 percent at the federal level.
It works like this: say an American manufacturer sells heavy farm equipment in Ireland. The company will pay the 12.5 percent corporate tax levied by Ireland. It will then need to make up the difference between Ireland’s rate and the U.S’s. The IRS provides the company a tax credit to account for the tax paid in Ireland and then taxes it at our full 35 percent rate.
But here’s the thing: this tax is only payed if and when a company brings those earnings back to the United States. So, with one of the highest corporate tax rates in the world, it’s easy to understand why our system discourages American companies from bringing those earnings back home. The manufacturer in our example stands to pay an extra 22.5 percent (35 minus 12.5) if it returns—or “repatriates”—that money.
And now you can see why so much American capital remains overseas, locked out of the United States by a poorly-designed and uncompetitive tax code.
The solution, in part, is to modernize our system so that it’s consistent with the way the rest of the world treats foreign profits. By transitioning to what’s called an exemption system, we can dramatically reduce or eliminate the tax paid when returning earnings to the United States. This way, American companies can make products here, sell them over there, and then bring that money back home to invest in American jobs without penalty.
This change would be a powerful boost to our economy, unleashing capital, investment, and good-paying American jobs.
It’s common sense; it’s overdue; and it’s what we’re working to do.