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Feb. 23 — During a political season in which populist fury and anger at big business is running high, two presidential candidates want to eliminate the ability of multinational firms to keep earnings overseas and avoid U.S. taxes.
They also just happen to be the two most surprising and disruptive candidates in the race: self-proclaimed Democratic Socialist Bernie Sanders (Vt.) and real estate mogul-turned-reality TV star Donald Trump.
While international corporate taxation is a peripheral issue on the campaign trail, the proposals fit into election-year messages blasting the status quo, a theme that has resonated so far in 2016. They also stand in defiance of slowly building political tides in Washington that seem to have been pushing the U.S. toward a territorial system—one in which the IRS would mostly exempt profits earned beyond U.S. shores.
“There's kind of an obsession in Washington, inside the Beltway, to reduce or eliminate taxes on foreign profits,” said Chuck Marr, director of federal tax policy for the Center on Budget and Policy Priorities, a left-leaning economic think tank. “And then you have all this populist anger, you have working-class people in difficult circumstances. They probably have no idea what that means. But they would certainly understand what it means to say, ‘no taxes on foreign profits.' There is a disconnect.”
The U.S. tax system taxes all profit from a U.S.-based company, including offshore earnings. But companies that earn income offshore can choose to defer repatriation of those earnings indefinitely—an ability that both the doggedly leftist Democrat and the fiery, brash Republican want to end.
Sanders, until recently an independent running for the Democratic nomination for president, is promoting a plan that also arguably moves away from President Obama, who has introduced in budget proposals a global minimum tax, but only at 14 percent—much lower than the current U.S. corporate tax rate of 35 percent .
The senator's plan would simply repeal deferral, creating a full worldwide tax system at the current U.S. corporate tax rate. The plan resembles legislation Sanders has introduced in recent years, including 2015 .
In addition, his tax plan would nix inversions and institute a new “managed and controlled” test to determine U.S. corporate tax residency.
During a Feb. 4 debate, Sanders described the proposal as “doing away with the tax loopholes that large corporations now enjoy by putting their money into the Cayman Islands and other tax havens”—although the plan would cover much more than that, also taxing income in jurisdictions that few would claim were a haven.
The U.S. is already one of the few remaining countries that attempts to tax worldwide profits. Doing so on an instant, non-deferred basis would make the system even more unusual and raises concerns from critics that it would put U.S. companies at more of a disadvantage than they already face, given the high U.S. corporate rate.
“I'm somewhat skeptical,” said Eric Toder, an analyst with the Tax Policy Center, a joint project of the Brookings Institution and the Urban Institute.
Toder said a strong worldwide system would create a huge incentive for companies to avoid U.S. tax residency—through inverting or being acquired—or never establish it in the first place.
Sanders' plan attempts to counteract those effects by reducing the ownership threshold—currently, the IRS can disregard inversions where a company is still 80 percent U.S. owned; Sanders' plan would reduce that to 51 percent—and look at headquarters operations to determine tax residency.
“The harder you make the residence test, the harder it is to change residence—but the bigger the consequences of their changing,” Toder said. “Right now, a company can invert, but there at least isn't economic consequence of it. They might continue to do everything the same, except pay less taxes. But if companies are shifting their headquarters, and they might be shifting their R&D, there might be some real changes going on there.”
Others argue that the proposal is better understood as a campaign document, not a comprehensive policy.
“Realistically, what the senator is saying is even if he were president, it's obviously an opening bid,” said Reuven Avi-Yonah, a tax law professor at the University of Michigan.
Avi-Yonah said he supports repealing deferral, but accompanied with a 28 percent tax rate.
“I think this is the sensible thing to do, because any other proposal, if you're going to maintain the current system, or move forward to territoriality—even if you reduce the rates significantly, you still get an incentive to shift income overseas,” Avi-Yonah said.
Meanwhile, Trump is the only Republican candidate to call for enhancing the worldwide system rather than shifting to a territorial system or doing away with the corporate income tax altogether.
However, he would also drastically lower the rate to 15 percent, which many experts say is tantamount to maintaining a territorial system because the foreign tax credit would likely refund any amount of tax due from a foreign jurisdiction.
In practice, Trump's plan may be similar to a global minimum tax, which has picked up bipartisan support in Washington over the past few years. In most foreign countries, where the tax rate is higher than 15 percent, U.S. multinationals would receive treatment identical to that under a territorial system—but they would also be discouraged from putting their income in a low-tax country.
Although Trump is one of the only Republican candidates to talk about corporate inversions during his campaign, his plan would not directly inhibit them—instead, he's claimed that once the tax rate is lowered, companies would no longer have an incentive to invert.
Toder said Trump's proposal could be seen as a vehicle to target U.S. multinational companies and aid other types of businesses, including flow-throughs to which deferral doesn't currently apply.
Experts say the drastic reduction in rates would wipe out any enhanced revenue from worldwide taxation. The right-leaning Tax Foundation, a Washington-based think tank, calculated that Trump's proposals would reduce federal revenue by $10.14 trillion over the next decade, even when accounting for possible economic growth spurred by the tax cuts.
The same organization predicted that Sanders' plan would increase revenue by $13.6 trillion over the next decade, although it reduces it to $9.8 trillion due to anticipated decreased economic output—so-called dynamic scoring, a controversial topic in its own right.
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