Tax Analysts Blog

Minimum Tax on Foreign Profits: Good Idea

Posted on Feb 7, 2012

In his 2012 State of the Union Address, the President re-iterated his pledge to reform the corporate tax by lowering the rate and broadening the base. One of his proposals to help pay for the rate reduction is a minimum tax on foreign profits:

    The President is proposing to eliminate tax incentives to ship jobs offshore by ensuring that all American companies pay a minimum tax on their overseas profits, preventing other countries from attracting American business through unusually low tax rates.
This proposal would not level the playing field between domestic and foreign investment by U.S. multinationals as would a repeal of deferral (discussed by my colleague Bob Goulder), but it would get rid of the largest (and therefore most economically damaging) incentives to shift jobs and profits offshore. The President's proposal is similar to the one I discussed at a 2006 conference sponsored by the International Tax Policy Forum and wrote about in a December 11, 2006 article for Tax Notes ("A Challenge to Conventional International Tax Wisdom"):
    The United States should consider -- in part as a backstop to the transfer pricing rules, and in part to trim the most potent incentives for investment in foreign production -- a modest tightening of U.S. tax rules for active income generated in low-tax countries. One possibility would require U.S. companies operating in low-tax countries to pay an additional U.S. tax on current foreign earnings equal to the difference between a minimum rate of, for example, 20 percent or 25 percent, and the effective foreign rate. U.S. companies would still have incentive to invest offshore, but the largest and most harmful incentives to shift income and investment out of the United States would be eliminated.

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