President Barack Obama hopes to raise $238 billion for infrastructure projects by taxing the foreign earnings of U.S. companies.
Currently, firms pay no taxes on their earnings from abroad until they move those earnings to the United States, at which point they face a 35 percent corporate tax rate. The result is that many firms have kept that money abroad.
“They have a strong incentive to not repatriate the profits,” says Joseph Cordes professor of public policy at George Washington University. Firms are now sitting on $2 trillion of foreign earnings stashed abroad. In the past, the government has tried to suck that money into the U.S. by offering a tax holiday – temporarily slashing the rate from 35 percent to 5 percent, according to Roberton Williams at the Urban Brookings Tax Policy Center. He says that has made the problem worse: “The history of repatriation gives firms an incentive to leave money overseas and wait for another tax holiday.”
The president’s plan offers a one time tax on earnings of 14 percent, which is higher than a tax holiday but lower than the tax on the books. Moving forward, firms would have to pay taxes on foreign earnings at a rate of 19 percent, whether or not they bring the money home.
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