It may seem unlikely, but Democrats and Republicans have found something to agree on this election cycle. The US corporate tax system has its flaws and needs reform.
Now, how to go about fixing it is another story.
Republican plan: Lower the tax rate.
Republicans argue that American businesses face the world’s highest corporate tax rates. Our statutory tax rate of 35% puts us in last place among all 35 OECD countries on the Corporate Tax Competitiveness Index. They assert that higher taxes encourage companies to shift operations overseas, reducing jobs and suppressing wages.
We also use a worldwide tax system, taxing US companies for all income earned in the US and overseas, once overseas income is brought back to the US that is. Republicans contend that many companies often keep their money overseas rather than bringing it back to the US to reinvest in the economy.
The Republican Party plans to incentivize US companies to keep more money in the US through two major tax reforms. First, “lower the corporate tax rate to be on a par with, or below, the rates of other industrial nations.” Trump’s plan specifically calls for a corporate tax rate of 15%. Second, reform the tax system to a territorial system rather than a global system. A territorial system would mean US companies pay taxes just where they are earned.
The argument goes that these combined efforts would allow more companies to bring their money back into the United States, freeing our businesses to create new jobs and raise wages.
Democratic plan: Close tax loopholes.
Democrats agree with Republicans that too much corporate money is sheltered overseas. A recent study estimates that Fortune 500 companies are keeping an estimated $2.1 trillion in accumulated profits offshore.
But, for them the fundamental problem is that American companies use loopholes to avoid paying their fair share of taxes. While the statutory tax rate is 35%, one study found from 2008-2012 profitable, large US corporations paid just 14% of pre-tax net income in taxes.
The Democratic Party plans to close these loopholes that allow US companies to lower their tax bills. One of the most significant changes would be taxing foreign income. Instead of switching to a territorial tax system, Democrats plan to “end deferrals so that American corporations pay United States taxes immediately on foreign profits and can no longer escape paying their fair share of U.S. taxes by stashing profits abroad.”
In the Democratic plan, added tax revenues would be used to reinvest in the economy. A new corporate tax code would create a level playing field for smaller domestic businesses and raise revenues for new tax credits that incentivize manufacturing in US communities in need of revitalization.
Why is this debate over reforms in the tax system of interest to sustainability professionals?
How much tax companies pay, and where they pay it, is becoming an increasingly important part of the debate on corporate governance and business reputation. Not just in the US, but all over the world.
So keep a very close eye on tax regulations. Solutions vary, but it’s clear that US companies will face growing scrutiny both at home and abroad about where they choose to keep their money. Pressure is coming from both our own politicians and from global initiatives like the OECD Base Erosion and Profit Sharing Action Plan which aim to set standards for country-by-country tax reporting.
If you haven’t already, now is the time to do your due diligence. Speak to your tax team. Find out if you have a tax policy. Map out where your business operates versus where you pay your taxes. Knowing where you stand is a critical first step in responding to the rising interest in corporate contributions to US tax returns.