Paul Nitze: Guest Opinion

Paul NitzeThe Aspen TimesAspen, CO Colorado

President Obamas proposal to change the corporate tax rules for American multinationals grabbed headlines earlier this week in most major papers. Business lobbyists have already mounted a counter-offensive, speaking out against the proposal on the air and in print. Despite the press, you can rest assured that phones are not ringing off the hook in legislative offices around the Capitol. Fact is that tax policy is boring, and corporate tax policy debates are sure to put even hard-core tax wonks to sleep.Unless you happen to work in the tax department, chances are you dont have the foggiest idea what your employer pays in taxes. Most Americans are unaware that the profits a company reports to its shareholders have almost nothing in common with the profits the same company reports to the IRS. This ignorance should come as no surprise. After all, were not on the hook for those taxes.Lobbyists and their friends in Congress count on this ignorance. Without it theyd be poorer and a lot less comfortable. Ambivalence about corporate tax policy has allowed corporations to steadily chip away at their tax liability over the past 50 years. Back in the 1960s, corporate taxes made up about a fifth of the overall federal tax pie. That figure is down to around a tenth, and continues to fall.Theres no getting around the fact that the presidents reform proposal is primarily a revenue-raiser. The White House has a long spending wish list, with health care at the top, and it needs to find money to pay for all of it. Tightening the rules on offshore taxes would generate a little more than $200 billion in revenue, no small chunk of change. But theres a moral component to the plan as well.We are one of the very few countries around the world that abides by a worldwide tax scheme. Most of the developed world uses a territorial scheme instead. In theory, a worldwide system means that whether you are a corporation or an individual, you pay the same tax rate no matter where you earn your money. A territorial system requires you to pay taxes only at the local rate, so if you live in London but earn all your money in Barbados, you pay Barbados taxes.In practice, neither system really works like this. But even defenders of our system agree that a worldwide tax regime is harder to manage than a territorial regime. Long ago, policy makers in the U.S. decided that American companies should only pay taxes on profits they bring back into the U.S., or else it would be impossible for our companies to compete in lower-tax countries. This makes sense, but it also makes our corporate tax regime devilishly tricky.Imagine an American company that makes soccer balls here in the U.S. and also in Ireland. Each countrys operation is vertically integrated, so everything from the manufacturing to the sales and marketing happens separately in each country. Ireland has a famously low corporate tax rate, 12.5 percent, against our top tax rate of 35 percent. You can see why an American companys outpost in Ireland wont be able to sell a single ball if it has to pay taxes at the higher rate. This is why we allow our companies to defer taxes on their foreign profits, and get a credit for any taxes they pay to foreign governments.Trouble is, no companys operations are structured this way. Marketing might be in the U.S., manufacturing in Mexico, and R&D in India. As currently written, our tax rules provide a huge advantage to companies that spread their operations around the globe.Heres how the game is played: You locate as many of your expenses as you can here in the U.S., where tax rates are higher, and you locate as much of your income in the lowest-tax country in which you operate. You accomplish this by intra-company accounting, called transfer pricing, and by strategic choices about where you put different parts of your business. You then defer bringing those profits back into the U.S. for as long as you possibly can. Or you successfully lobby Congress to let you bring it back home at a lower rate, as happened a few years back.This system is fundamentally unfair to companies whose operations are located in the U.S. President Obama made this point explicitly: [Its] a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.While there is a much larger issue in the background, namely when and if countries will cease their race to the bottom on corporate taxes, we have got to stop penalizing companies that choose to keep jobs in the U.S. There is no small irony in the fact that even as we pump billions of dollars in federal money into our manufacturing sector (namely the auto companies), we perpetuate a tax system that makes it bad business to open a new factory in the United States. The presidents proposal is only an opening salvo. What, if any, changes are written into law depends on what happens outside of public view, in the offices of House and Senate tax dons, and in closed-door committee meetings.If voters dont pay any attention, the presidents proposal will get short shrift. While the voters sleep, lobbyists will be scheduling meetings, targeting donations and reminding members just how many jobs those multinationals provide. What they wont be saying is that at the same time those multinationals take advantage of our laws and our infrastructure, they do whatever they can to avoid paying the tab. The president has struck the right moral tone for this debate now is the time for voters to wake up and provide some muscle to his message.

Paul Nitze is a deputy district attorney in Adams County and has been a part-time Aspenite his entire life. Before attending law school, he worked as a legislative assistant to another part-time local, Sen. Dianne Feinstein (D-Calif.).


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