Taxing American companies on foreign profits

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There's been a lot of talk recently about rewriting and streamlining the tax code ? if President Obama succeeds, American companies will be paying a lot more taxes on their foreign profits overseas. Is that good for the American economy or bad? And will that mean higher prices for you and me? The World's Jason Margolis visited Michigan to find out.

MARCO WERMAN: I'm Marco Werman, this is The World. Tax day is Thursday and the U.S. government needs the money. The federal debt has ballooned in recent years. Naturally, the debate in Washington is about where to cut spending and how to raise revenue. One idea favored by President Obama is to tax American companies on their foreign profits. But the jury is still out on whether that's a good idea, as The World's Jason Margolis found out in Michigan.

JASON MARGOLIS: Let's say a fictional American company is making widgets in Viet Nam or Belgium, or wherever. This company then pays taxes profits to the local government. The company only pays taxes to Uncle Sam when profits are brought back to the United States. President Obama wants to end that practice. American multi-nationals don't like it one bit. Or rather, they probably don't like it. I called several big multi-nationals, companies like Caterpillar and Kellogg's. They declined to talk about the topic. Not surprising, says economist Lee Branstetter at Carnegie Mellon University.

LEE BRANSTETTER: You can sort of understand where they're coming from, right? I mean in a sense that there is some controversy here and they have to look out for their public image. It's hard for multi-nationals to argue against paying taxes when the President frames the debate like this:

PRESIDENT BARACK OBAMA: It's a tax code full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share. It's a tax code that makes it all too easy for a number, a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all. And it's a tax code that says you should pay lower taxes if you create a job in Bangalore, India than if you create one in Buffalo, New York.

MARGOLIS: Tough talk. But are multi-nationals shirking their fair share, or is that just a good sound bite?

JAMES HINES: Do they pay their fair share? Yeah.

MARGOLIS: Economist James Hines is a tax expert at the University of Michigan.

HINES: There's no suggestion that they don't comply with the laws. Multi-national corporations, many of them are audited every year, and so in the category of do they pay their fair share? Look that kind of gets to the question of what should the corporate tax rate be?

MARGOLIS: The federal corporate tax rate for domestic profits currently stands at 35%. Just across the quad at the University of Michigan Law School, tax expert Reuven Avi-Yonah sees the fair share question differently.

REUVEN AVI-YONAH: I think that the comparison has to be with an individual or with a small business that are paying their full 35 and compare to that. I think clearly in my opinion the multi-nationals don't pay their fair share because at least on their overseas profit they're paying much, much less than that.

MARGOLIS: American corporations pay about 2% on foreign profits, according to President Obama. But one big question is if the U.S. raises the tax on foreign profits, will American corporations simply move their headquarters to another country? Lee Branstetter at Carnegie Mellon says that's not likely to happen any time soon, but in the long run, you never know.

BRANSTETTER: And if a multi-national company is looking at over some period of years a difference in international tax liability on the order of billions of dollars or even tens of billions of dollars, then you might argue that they have a fiduciary responsibility to their share holders to at least consider the option of relocation if it's going to mean saving that much money.

MARGOLIS: But tax expert Reuven Avi-Yonah doesn't buy that argument.

AVI-YONAH: I just don't think that the executives would want to live in Bermuda. The level of services in Bermuda is commensurate to the level of taxation so you don't get good schools, you don't get good roads, you don't get good of any of these things so people, the executives would want to stay in the United States and that's where they get taxed.

MARGOLIS: President Obama's economic team shares this perspective. The President argues that if American multi-nationals are forced to pay higher taxes on foreign operations, it will push American companies to invest more in operations in the United States. He's also offering tax incentives to do that. But some economists like James Hines say it won't necessarily work out that way.

HINES: Even if all you care about is the domestic business operations of these companies, you should not want to excessively discourage their foreign business activities because that's how they generate a lot of their profits. It makes their domestic, U.S. activities more profitable and more desirable.

MARGOLIS: That creates more jobs here in the U.S. argues Hines. He's no anti-tax crusader thought. Hines says that as the federal debt grows, the President and Congress are going to have to raise taxes somewhere or they can simply cut spending. For The World, I'm Jason Margolis, Ann Arbor, Michigan.

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