An open letter to Congress: There’s a smarter way to do corporate income tax and this opportunity should not be wasted

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• The Senate tax bill would add to the pain of the middle class, without helping American companies.
• The current tax system has incentivized corporate inversions, profit shifting, recognition deferral and other notorious ills – and the pending bill will continue to do so.
• Several progressive economic and legal scholars have written a joint letter to congressional leaders, calling for the adoption of a smart, territorial corporate income tax called sales factor apportionment (SFA).

As the ill-advised Senate tax bill hurtles to likely approval this week, many of us watch with mouths agape at the shoddy economic policy reflected therein and the damage that this kelptocratic version of “reform” (i) will do to further the pain of the middle and working classes and (ii) won’t do to ameliorate the disadvantages faced by our domestic manufacturers and other enterprises, which under the present legislation will continue to face competition from U.S. and other multinationals that will continue to divert their taxable income to tax haven jurisdictions around the world.

The GOP congressional leadership and the White House could and should have embarked on real corporate tax reform, that is in the national interest and broadens the tax base while trimming marginal rates – and should the pending bill be held up, there is still an opportunity to do so on a bipartisan basis.

I have joined with several prominent progressive economic and legal scholars – Dean Baker, Bradley Delong, Gabriel Zucman, Robert Hockett, and Marshall Steinbaum – together with Michael Stumo, of the non-partisan Coalition for American Prosperity, to which I am an adviser – in calling for an end to corporate tax discrimination against U.S. companies.

In the attached open letter to Congressional leaders, we call for the adoption of a smart, territorial corporate income tax called sales factor apportionment (SFA). While territorial taxes are typically associated with political conservatives, the letter reveals a significant opportunity for cutting-edge corporate tax reform which can appeal to both the left and the right.

The current tax system has incentivized corporate inversions, profit shifting, recognition deferral and other notorious ills – and the pending bill will continue to do so. It relies upon a separate accounting of profits on a location by location basis so that multinational corporations (MNCs) strategically allocate earnings and costs in each location in which they operate. Though our current system purports to tax MNCs worldwide income, profit-shifting allows them to evade taxation on the basis of where their net income “lands” rather than where their gross income originates. The result is tremendous incentives to “earn” – i.e. to declare – income in low-tax countries. It is a classic race to the bottom causing the US corporate income tax base to erode at an alarming rate and permitting companies to take advantage of strong American consumer demand without paying their fair share for access to our markets.

Tax competition between countries is highly incentivized by the current regime. While the effective US corporate income tax rate is estimated at 27%, it is mostly avoided by MNCs which are thus systematically advantaged relative to domestic US producers. Tax haven jurisdictions, where a large proportion of corporate earnings are reported, have very low effective rates between zero and five percent. Those countries include the Netherlands (2.3%), Ireland (2.4%), Bermuda (0.0%), Luxembourg (1.1%), Singapore (4.2%), UK Islands Caribbean (3.0% and Switzerland (4.4). Lowering the US corporate tax rate to 20% does not materially change the incentive to allocate profits to these “Cayman-style” jurisdictions.

Congress cannot confidently set a tax rate until it solidifies the tax base – and SFA is the way to accomplish this. Please read the attached letter and press release, and join with us declaring to Congress and the White House that the pending tax bill the disaster that it is to American domestic companies that employ American workers in competition with multinationals and foreign companies.

Here is the letter: