On multinationals' taxes, Obama should just follow Wyden's lead

Steve Novick

The other day, Barack Obama released a series of proposals to limit multinational corporations’ ability to avoid American taxes.  The President is going in the right direction.  But the response of tax analysts made it clear that Obama should have simply followed the lead of a Senator who has offered a much simpler, fairer, more progressive solution to the problem: Ron Wyden.

When it comes to taxing multinationals, the original sin of the U.S. tax code is that multinationals don’t pay American taxes on the profits of their overseas subsidiaries until they bring the money home. This provides a huge incentive to shift jobs and profits overseas.  Many tax analysts believe that multinationals artificially inflate their profits in low-tax foreign countries, and deflate their profits in the United States (and other higher-tax nations), in order to avoid taxes. In his “Fair Flat Tax Act” proposal, Senator Wyden has a simple solution: End the deferral.  When American multinationals earn profits, they pay American taxes on all of them (subtracting the taxes they paid the foreign nation). 

The other day the New York Times reported that President Obama proposed a series of measures to address multinational tax avoidance, such as one to “prohibit companies from taking deductions in the United States for expenses on overseas investments until they have paid domestic taxes on the profits from those investments … Another proposal would close a loophole that allows companies to inflate the credits they claim for foreign taxes to the I.R.S.”

But the Times ran a companion article that said that Obama’s proposals would do nothing to address ‘transfer pricing,’ where companies artificially inflate or deflate the prices their American and foreign operations charge each other for goods and services in intra-corporate transactions.  If, through such gamesmanship, a corporation artificially charges its American operation a high price for goods or services sold by a tax-haven subsidiary, it reduces the stated profits of the American operation – and avoids taxes.  According to the Times:

Senator Wyden’s proposal – ending the deferral – would make transfer pricing irrelevant.  If you pay American taxes on your foreign earnings right away (after subtracting taxes actually paid abroad), the intracorporate game-playing is meaningless. 

This isn’t the only tax issue where Senator Wyden has a simpler, more progressive approach than the President.  The other major one is the tax treatment of income from wealth (capital gains) as opposed to income from work.  Obama wants to reduce the current tax code’s favoritism toward income from wealth. Wyden wants to eliminate it – tax income from wealth and work equally.

Ron Wyden’s attitude toward eliminating special favors for huge corporations and wealthy individuals is could be summed up by quoting the slogan of Oregon’s very own multinational corporation:

Just do it.

By Steve Novick May 08, 2009