Taxing foreign corporate profits

The Wall Street Journal indicates that Obama plans to tax the foreign profits of US companies.  Currently, these profits are taxed when they are repatriated only.  Since the US already has one of the highest tax rates in the OECD (second to Japan), this means that taxes on US companies would rise a lot.  As I understand it, US corporations could still obtain a credit for taxes paid overseas, but would have to pay the difference between what they pay overseas and the US rate.

As an example of what this means, take a look at the difference in tax treatment if Microsoft were based in Vancouver, BC, only 120 miles from Seattle.  The Canadian corporate tax rate for 2009 will be 19%, while the US rate is about 35%.  Microsoft last year in fact paid a rate of just over 33% on its GAAP reported taxable income.  If Microsoft were to move up north, then they could reduce their overall tax burden by nearly $3 billion, increasing their net income from about $17 billion to about $20 billion.

Exxon, the company all Democrats love to hate, paid income tax of $52 billion last year on taxable income of $94 billion.  That’s a 52% effective rate.  How much could they save if they moved to Canada?

Democrats need to realize that multinational corporations domiciled in the US have at all times the option to move their headquarters out of the US.  Many companies- I think of IBM as a good example- have already moved their center of gravity for skilled workers out of the US.  The senior management of many of these companies are increasingly from other countries.  Overall, there are fewer and fewer deep ties between them and the US.

Moving away is not just a financial decision, or else many companies already would have gone.  This kind of decision is based on consideration about which countries are likely over the long term to be most hospitable to the company and its employees.  Until now, the US has been the best headquarters location in the world because of our transparent rule of law, financial and political stability, business-friendly regulation and reasonable costs.

Today, in my opinion, the Democrats are creating an environment in which the long term outlook for multinationals based in the US is bleak, not just the short term.  The regulatory outlook is negative, and the federal government is running enormous deficits which will have to be repaid through higher and higher taxes.  Cap and trade will impose huge costs on businesses.  And just as important as the rest, I would wager that executives are tired of being blamed for not paying their fair share of taxes, and for behaving irresponsibly, even while they build the world’s greatest businesses, and pay taxes among the highest in the developed world.  I’ll make no excuses for the reprehensible behavior of our investment bankers- but as a US citizen, I’m tremendously proud of the achievements of US companies like Microsoft, Exxon, 3M, P&G, IBM, Google (!?), Apple- and on and on and on.  These are the companies which we need to support, not castigate.