Inflation is on everyone’s mind in Washington right now. And Congress is weighing legislation to spur the economy while reining in the federal deficit. That would certainly be a good thing. But most insiders are betting against the passage of reconciliation legislation. And if that happens, Congress could squander a valuable opportunity to finally improve the U.S. tax code in favor of domestic U.S. companies.
Yes, inflation is a key concern. And yes, there’s a war in Europe right now.
Technical fixes needed
But some long-term thinking is in order as well. That’s because domestic U.S. companies continue to be disadvantaged by a tax code that favors multinational producers. In response, Congress can’t miss this chance—and should focus on two proposals currently under debate: a country-by-country technical fix to the global intangible low tax income (GILTI); and, a corporate alternative minimum tax (CAMT).
What’s really at issue is a longstanding problem: multinational corporations continue to enjoy the benefits of profit-shifting. Essentially, by transferring profits to tax-haven nations, multinationals face an effective U.S. corporate tax rate below 10%. In contrast, domestic American corporations must pay a tax rate closer to 21%.
All of these taxes are a major cost for domestic producers. That’s why many U.S. companies recently welcomed the prospect of their overseas competitors finally paying at least a 15% minimum effective income tax. It’s not the perfect situation, of course, and U.S. companies would be grateful to pay such a low rate. But it would mark a helpful start toward tax parity.
And that brings us to Congress, which is currently weighing several proposals intended to correct shortcomings in the 2017 Tax Cuts and Jobs Act (TCJA).
For starters, the 2017 legislation’s GILTI loopholes allowed multinational companies to manipulate their reporting of overseas tax payments. Essentially, GILTI allows them to combine all of their overseas tax payments into one calculation. Doing so has proven unfair since multinational corporations simply manipulate their GILTI calculations by playing one country’s tax code against another.
The good news is that Congress can fix this problem quickly in the reconciliation legislation by moving GILTI calculations to a country-by-country basis.
Long overdue
Unfortunately, the TCJA didn’t end profit-shifting. So, there’s also the CAMT, which requires large U.S. and foreign multinationals to pay at least a 15% tax on the profits they claim to shareholders—known as a book-tax.
The book-tax that the CAMT proposes is long overdue. That’s because filing an incorrect shareholder report can incur more substantial penalties than avoiding the taxes required by the IRS. And so, if Congress passes legislation containing a CAMT, multinationals will be required to use a third-party verification system in order to produce both accurate profit-reporting and effective-rate tax collection.
These are some of the critical tax problems that Congress must confront. But the timing is certainly ripe, given the range of proposals currently being offered to combat runaway inflation. Realistically, Congress should weigh the country’s mood—including the American people’s increasing frustration with prominent multinationals that continue to realize record profits while paying little or no taxes.
A step forward is better than doing nothing at all. That’s why Congress must make meaningful progress on improving the corporate U.S. tax code. The overriding goal should be to finally ensure that smaller, domestic businesses—which employ the overwhelming bulk of the U.S. workforce—finally enjoy a level playing field. That’s the most prudent long-term medicine for the U.S. economy.
David Morse is tax policy director at the Coalition for a Prosperous America Education Fund, which is a nonprofit organization that advocates for fair, just and balanced international trade policies.