Inflation is on everyone’s mind in Washington right now. And Congress is weighing legislation to stimulate the economy while keeping the federal deficit under control. It would certainly be a good thing. But most insiders are betting against passing reconciliation legislation. And if that happens, Congress could squander a valuable opportunity to finally improve the US tax code in favor of US domestic companies.
Yes, inflation is a major concern. And yes, there is a war in Europe right now.
Necessary technical corrections
But long-term thinking is also required. That’s because US domestic companies continue to be disadvantaged by a tax code that favors multinational producers. In response, Congress cannot miss this chance and should focus on two proposals currently under debate: a country-by-country technical solution to Global Intangible Low Tax Income (GILTI); and, an Alternative Minimum Corporate Tax (CAMT).
What is really at issue is a long-standing problem: multinational corporations continue to reap the benefits of profit shifting. Essentially, by shifting their profits to tax haven countries, multinationals face an effective US corporate tax rate of less than 10%. In contrast, US domestic corporations must pay a tax rate closer to 21%.
All of these taxes are a significant cost to domestic producers. That’s why many American companies have recently hailed the perspective of their foreign competitors ultimately pay at least 15% minimum effective income tax. It’s not the perfect situation, of course, and American companies would be grateful to pay such a low rate. But it would mark a useful start towards tax parity.
And that brings us to Congress, which is currently weighing several proposals intended to fix the shortcomings of the Tax Cuts and Jobs Act of 2017 (TCJA).
For starters, the GILTI loopholes in the 2017 legislation allowed multinational companies to manipulate their reporting of offshore tax payments. Essentially, GILTI allows them to combine all of their overseas tax payments into one calculation. This has proven to be unfair since multinational corporations simply manipulate their GILTI calculations by playing one country’s tax code against another.
The good news is that Congress can fix this problem quickly in reconciliation legislation by moving the GILTI calculations on a country-by-country basis.
Unfortunately, the TCJA did not end the transfer of benefits. So there is also the CAMT, which requires large US and foreign multinationals to pay at least a 15% tax on the profits they claim from shareholders, known as the “book-tax”.
CAMT’s proposed book tax is long overdue. This is because filing an incorrect shareholder report can result in greater penalties than avoiding taxes required by the IRS. And so, if Congress passes legislation containing a CAMT, multinational corporations will be required to use a third-party verification system to produce both an accurate profit statement and tax collection at the effective rate.
These are some of the critical fiscal issues that Congress must address. But the time is certainly right, given the range of proposals currently on offer to combat runaway inflation. Realistically, Congress should weigh the mood of the country, including the growing frustration of the American people with top multinational corporations that continue to make record profits while paying little or no taxes.
One step forward is better than doing nothing at all. That’s why Congress needs to make meaningful progress in improving the US corporate tax code. The overriding goal should be to finally ensure that small domestic businesses, which employ the overwhelming majority of the American workforce, finally enjoy a level playing field. This is the most prudent long-term remedy for the US economy.
David Morse is director of tax policy for the Coalition for a Prosperous America Education Fund, a nonprofit organization that advocates for fair, just, and balanced international trade policies.