Ending the Biggest Tax Rip-Off -- Tax Deferral

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Over the last few weeks Americans have heard lots of talk that the economic system is rigged and corporations don’t pay their fair share when it comes to taxes. At the heart of this mess is the big dog of tax rip-offs – tax deferral.

This is the rule that encourages American multinational corporations to keep their profits overseas instead of investing them here at home, and it does so by granting them $80 billion a year in tax breaks. This policy is as foolish as it is unfair. It simply defies common sense.

Most Americans probably aren’t familiar with deferral as it only benefits big corporations, but they don’t need to understand complicated tax law in order to recognize that some of the most profitable companies in the world can put off paying taxes indefinitely while hardworking Americans must pay their taxes every year. The goal of deferral was to protect against double taxation, but with the rise of tax havens and the ability to transfer intangible property around the world, too often Americans get fleeced by double non-taxation.   

Here is how it works. U.S. companies with operations overseas don’t have to pay taxes on profits they earn from, say, selling soft drinks or software outside the U.S. as long as those profits stay overseas. This was intended to help these companies compete around the world almost a century ago. However, today that system creates a perverse incentive to keep corporate profits overseas instead of investing here at home.

What’s even worse is companies can also take advantage of current gaps in the tax rules on intangible items such as software to shift what are really U.S. profits abroad where they are subject to much less or, too often, no tax at all.  These profits, generated by American innovation, stay in countries such as Ireland or the U.K., and U.S. companies have the luxury of deciding when or even whether to pay U.S. taxes. Today they have exercised that option not to pay taxes to the tune of $2.2 trillion!

Few even try to argue that tax deferral is good policy. Dating back to 1918 and President Woodrow Wilson, deferral is yet another example of how Washington policy has not kept up with the economic realities of today’s world. In the face of globalization over the last 98 years, with countries abroad dropping their tax rates to attract investment, deferral has become nothing more than an incentive to invest in Indonesia rather than Indiana and a drain on the U.S. economy. Like many other aspects of our antiquated tax system, it screams out for a massive overhaul.

As I have long called for, ending deferral is a necessary step in making sure taxpayers get a fair deal and the U.S. maintains its position as the best place to do business.  Combined with a new competitive corporate tax rate that reflects global tax realities and a structure that prevents shifting income to avoid taxes, it will encourage companies -- both domestic and multinational -- to build and grow their businesses in the U.S., creating red-white-and-blue-jobs here at home.

I have authored the only two bipartisan tax reform proposals -- with Republican senators -- in over a quarter-century and both reward the creation of good-paying jobs in the United States. A substantial portion of these proposals is paid for by ending overseas tax deferral.

Ending deferral will also generate money from existing deferred taxes to pay for rebuilding our country’s crumbling infrastructure. The roads and bridges we rely on every day are falling apart.  The American Society of Civil Engineers estimates we need $3.6 trillion of investment by 2020 just to get the condition of U.S. infrastructure to state of good repair.  This is a priority that almost all tax reform proposals have called for.

As Congress looks ahead towards the prospect for tax reform with a new president, the end goal of any efforts must be growing the economy, creating jobs and rebuilding roads to get there. That starts with ending deferral and putting in place a fair and simple tax code that gives everyone a chance to get ahead.

Ron Wyden, a Democrat, is the senior U.S. senator from Oregon.

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