Our corporate income tax system is a bloated, complicated mess. With their lower corporate tax rates, our trading partners are eating our lunch and taking away our jobs. For example, most of our pharmaceutical manufacturers, including Pfizer, the world's largest drug maker, have set up shop in Ireland to avoid paying U.S. taxes. This is solely because Ireland charges a corporate tax rate of only 12.5%.
President Obama's budget for fiscal year 2016 calls for a cut in the corporate tax rate from 35 to 28 percent (with a special rate of 25 percent for manufacturing). European countries have an average corporate income tax of 23 percent. I propose a 28 percent corporate tax rate, with a zero (0%) tax rate for manufacturing companies, and a one time amnesty rate to repatriate earnings held offshore at a 14% rate.
U.S. corporations are sitting on trillions of U.S. dollars held in offshore accounts.
According to Bloomberg News, Microsoft, Apple, Google and five other tech firms now account for more than one fifth of the $2.10 trillion in profits that U.S. companies are holding overseas. Under my tax proposal, companies could bring home this $2 plus trillion pie, invest this money in new factories and businesses, and the U.S. Treasury would reap a $300 billion bonus.
The Real Corporate Tax Rate
In 2010, the last time the Government Accountability Office measured the rate, U.S. Companies paid an average effective federal tax rate of 12.6 %. That rate compares with the nominal corporate federal tax rate of 35%; those corporate accountants appear to have done their jobs well in exploiting the loopholes in our current tax code. Amazingly, General Electric, despite billions of dollars in profits, is noteworthy for rarely paying any income tax at all.
Corporations now evade U.S. taxes by issuing executive stock options, using the oil depletion allowances, in addition to taking advantage of capital gains rates and other loopholes. Many of Silicon Valley's newest star companies are able to shelter a large portion of their profits as a result of using executive stock options. Citizens for Tax Justice estimated that a dozen technology companies, including Amazon, Twitter, LinkedIn and Priceline, "stand to eliminate all income taxes on the next $11.4 billion they earn - giving these companies $4 billion in tax cuts."
Amazon's combined federal and state effective tax rate was just 9.4%. Without this ridiculous stock option tax break, the combined tax rate would have been 40.4 percent.
Overall, the corporate taxes now contribute only about 10 percent of total federal revenues. Under my proposal, corporations would pay more money to the federal treasury and thus create more jobs. On total federal tax revenues of $3 trillion a year, corporations now contribute only about $300 billion. Individual citizens pay the bulk of federal tax revenues.
Eliminate Loopholes
Manufacturing is the primary area where the United States has lost jobs over the past twenty years. Manufacturing also creates more jobs than other businesses because it creates jobs with suppliers and service providers needed to support the manufacturing process as well as buildings and equipment necessary to manufacture products.
If we lower the corporate tax rate to 28% and eliminate all loopholes (no investment tax credits, no oil depletion allowance, etc.,) we can institute a tax on manufacturers of zero (0%) percent. This would be based on the amount of U.S. content in the products manufactured.
Not all manufacturers are the same. This zero tax rate would only apply to products made with 100% U.S. content. For example, if a manufacturer assembles a product in the U.S. with 50% U.S. content, the manufacturer would pay an income tax of 50% of the 28% rate or 14%. However, if the manufacturer had 100% U.S. content, its tax rate would be zero.
This new manufacturing tax rate would serve to incentivize manufacturers to make their products here in the United States. It would help to create millions of jobs in the USA by bringing manufacturing back to New York, Illinois, California, Ohio, Michigan and every other state.
