The United States has the second‐highest corporate tax rate in the developed world. To make matters worse, the U.S. has the world’s worst “worldwide” tax system for companies, meaning that American firms competing in global markets have to pay tax to the nations where they operate — and then report that same income to the IRS for additional taxes. Needless to say, this is a huge ball‐and‐chain that undermines U.S. competitiveness. Companies try to protect their shareholders and workers by taking all possible steps to minimize and/or delay these onerous additional taxes. Sensible people would look at this mess and immediately decide that the right answer is lower tax rates and a shift to “territorial” taxation. Politicians, however, think that companies should deliberately choose to pay higher taxes. Tax-news.com reports that Senators Baucus and Grassley are especially fond of blaming the victims:
Senate Finance Committee Chairman Max Baucus (D — Mont.) has expressed dismay at the findings of a report by the Government Accountability Office (GAO), which show that US multinational companies are increasingly reporting income offshore to cut their tax bills. The GAO report, published on Monday, found that the number of foreign operations of US companies is increasing, with the largest companies paying the lowest effective tax rates, and more income being reported in lower tax rate jurisdictions outside the US. However, what has provoked the ire of Baucus and his Republican counterpart on the committee, Chuck Grassley, is the report’s conclusion that businesses may be manipulating existing tax laws by shifting corporate income and tax planning to foreign tax rate jurisdictions in which they operate. …The GAO, which based its report on an analysis of Internal Revenue Service (IRS) data on corporate taxpayers, found that the average US effective tax rate on the domestic income of large corporations with positive domestic income in 2004 was an estimated 25.2%, although there was considerable variation in tax rates across these taxpayers. The average US effective tax rate on the foreign‐source income of these large corporations was around 4%, reflecting the effects of both the foreign tax credit and tax deferral on this type of income. Effective tax rates on the foreign operations of US MNCs vary considerably by country, according to the report. Estimates for 2004 show that Bermuda, Ireland, Singapore, Switzerland, the United Kingdom, Caribbean Islands, and China had relatively low rates among countries that hosted significant shares of US business activity, while Italy, Japan, Germany, Brazil, and Mexico had relatively high rates. …the GAO concluded that the reporting of the geographic sources of income “is susceptible to manipulation for tax planning purposes” and appears to be influenced by differences in tax rates across countries. “Most of the countries studied with relatively low effective tax rates have income shares significantly larger than their shares of the business measures least likely to be affected by income shifting practices: physical assets, compensation, and employment. The opposite relationship holds for most of the high tax countries studied,” the GAO stated.