A salable solution for corporate tax reform

In his recent State of the Union address, President Obama revisited a key proposal from his 2008 campaign: to reform a corporate tax code that he says encourages U.S. firms to invest and expand overseas. Few would disagree that corporate tax reform is needed, but the universal system Obama has proposed is the direct opposite of the territorial system favored by many large U.S. corporations. Not surprisingly, Obama’s calls for reform have failed to gain any traction on Capitol Hill. However, it is possible to achieve the President’s goals while also satisfying big business and both political parties.

A true universal system, such as the President proposes, would tax the worldwide profits of American corporations regardless of where those profits are held. (Currently, corporate offshore income is taxed only when it comes home to the U.S. This lures companies to keep profits overseas, reducing tax revenues and discouraging domestic investment.) A territorial system, conversely, would tax only those profits earned in the United States.

Most of the world has embraced the territorial tax system. There are two major reasons. First, a universal system puts firms at a competitive disadvantage by taxing profits that are also taxed in other jurisdictions. Second, universal systems provide many ways for firms to shelter and obscure income offshore. While keeping armies of tax professionals busy, universal systems can result in lower than expected revenues. The United States can and should create a simpler and better system – one that Republicans, Democrats and the business community can agree on.

The simplest, best and least controversial solution is this: a territorial system that assesses corporate taxes on the same percentage of worldwide profits as domestic sales contribute to worldwide sales. In this system, a corporation’s taxes would be calculated in three simple steps. First, the company would calculate its total worldwide sales.  Next, it would calculate its worldwide pre-tax profits. Finally, it would multiply the ratio of U.S. sales to worldwide sales by worldwide pre-tax profits to calculate taxable income. It is conceivable that a medium-size corporation could file its report on a single sheet of paper.

Under this system, highly profitable multinational companies that currently pay little or no U.S. corporate taxes would now pay their equitable share while avoiding unfair double taxation abroad. By the same token, this system would equitably tax foreign firms that now may altogether escape being taxed on U.S. sales. This would result in a broader, stronger revenue base and improved competitiveness for U.S. corporations.  

These changes would not only allow U.S. firms to compete against international firms' import sales, but they would encourage domestic manufacturing of goods for export. Because exports would not be taxed, American firms would be encouraged to keep and create jobs at home. This would help grow the economy and bolster the revenue outlook.

This plan simplifies the tax code, encourages domestic investment and ensures reliable revenues. It also saves both the government and corporations hundreds of millions in enforcement costs. It should therefore provoke much more agreement than controversy.  With strong leadership from both sides of the aisle this plan can be the solution that nearly everyone agrees we need.

Bill Parks is founder and president of NRS, Inc. Started with $2,000 in 1972, NRS is now the world’s largest paddlesports accessory provider., He also served on the Business faculty, University of Oregon, Colorado State University and University of Idaho, 1965-94.

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