Dallas Morning News business columnist Bill Deener does an excellent job writing about the stock market, investments and the economy. But he completely missed the mark in his latest column, “How large companies avoid paying billions in taxes.”
Deener is talking about foreign-sourced income—the income U.S. companies earn overseas. In a global economy, it is not unusual for an American company to do more business overseas than it does in the U.S. Those profits can be reinvested in overseas operations, or they could be “repatriated” back to the U.S.
But Deener leaves the impression that U.S. companies pay no taxes on those foreign profits unless they bring them back, which is not the case. While he does say in the first paragraph companies are “avoiding billions of dollars in U.S. income taxes,” in virtually every other mention he calls them “untaxed foreign earnings.”
But they ARE taxed!
U.S. companies with foreign operations pay those countries’ corporate income taxes, just as foreign companies operating in the U.S. pay the U.S. corporate tax rate on profits earned in the U.S. They are not “untaxed” profits.
Virtually every other developed country operates under a “territorial tax system,” which means that companies domiciled in one country and operating in other countries pay only those foreign countries’ corporate income taxes.
By contrast, the U.S. operates under a “global tax system.” U.S. companies with foreign operations pay the relevant foreign corporate tax rate on those profits, but if they bring that money back to the U.S., they also have to pay U.S. corporate taxes.
Companies get a credit toward the foreign taxes paid, and give Treasury the difference between the foreign taxes and the U.S.’s 35 percent corporate rate, the highest in the developed world. As a result, many companies leave those profits overseas.
If the U.S. corporate tax rate were much lower—say, 20 percent or 25 percent—the difference between the foreign taxes paid and the additional U.S. taxes would be much lower, and in some cases zero, and so there would be less of a tax barrier to repatriating those funds.
Finally, Deener has embraced President Obama’s notion of “economic patriotism,” wherein companies are supposed to pay higher taxes even if they can legally avoid them, which must make me a non-patriot too, because I—and I suspect many of you—annually put earned income aside and do not pay taxes on it. It’s called an IRA.
The repatriation issue opens the door for a serious discussion about the pressing need for tax reform in a global economy. Deener chose not to walk through that door.
Companies are not evil for legally minimizing their tax obligations. What’s evil is when a big-spending government goes trolling for evermore tax revenue and denigrates people and companies as unpatriotic because they don’t agree.
June 10, 2015