Commentary | Trade and Globalization

Shrinking loopholes

Earlier this week, the Obama Administration announced several important proposals to close loopholes that allow multinational corporations to avoid paying taxes, and to crack down on illegal tax evasion by individuals.  These proposed changes are certainly a move in the right direction.

It is now well documented that corporations have been exceptionally successful at using every legal means to game the system to reduce their tax obligations. For example, the GAO has noted that 83 of the 100 largest U.S. corporations have subsidiaries in tax havens; and in 2004 U.S. multinational corporations paid taxes amounting, on average, to just 2.3 percent of their $700 billion in foreign income. Not only do current tax rules allow corporations to dodge their responsibility, but they also create perverse incentives to keep capital investments abroad,  thus encouraging companies to create jobs offshore rather than here at home.

The measures outlined by the administration would also crack down on individuals’ use of tax havens and secretive banks abroad.  By requiring certain banks to share information with the U.S. and by devoting more resources to international tax enforcement, the IRS would have a fighting chance of catching these law-breakers.

The revenue raised by these changes would be used to extend the Research and Experimentation tax credit that was intended to encourage R&D here in the U.S. The tax credit is typically extended piecemeal in one- or two-year increments by Congress. While the current tax credit can and should be improved, adding a measure of certainty is important to allow businesses to properly plan for future expenditures. By paying for the extension, the administration is showing a commitment to fiscal responsibility.

While there are still many tax policy challenges ahead, these common-sense changes are a good first step toward modernizing the tax code so that multinational corporations and wealthy individuals cannot dodge their obligations.

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