The US corporate tax rate is the highest among developed nations at 35% at the federal level. Tack on state and local taxes, which can add 5-7%, and US corporations are looking at a 40%-42% income tax burden. But the US takes it even another step further, unlike any other country in the developed world.
Uncle Sam demands that American companies with offshore operations pay US taxes on all income earned abroad – if those profits are repatriated to the US – even though taxes have already been paid to the countries where the income was actually generated. Think of it as double taxation on profits.
No wonder then that more and more US corporations with offshore operations are keeping those profits outside the US in order to avoid this double taxation. It is estimated that up to $2 trillion of those foreign profits are parked outside the US. That is a ton of money which, if brought home, could result in lots of new projects that could create many new jobs.
With an obligation to their shareholders to maximize profits, large US corporations are increasingly taking additional steps to minimize taxes owed to the Treasury in a process that has been coined “tax inversion” as I will explain below. This involves US firms moving their corporate headquarters overseas to countries where the tax burden is lower.
Today, we’ll explore how the extraordinarily high US corporate tax rate hurts the economy and why more and more large American corporations are moving their headquarters offshore. And we’ll look at why the Obama administration is trying to stop it – when all it would take to fix it is the US lowering its tax burden to a more reasonable level. But no, Obama wants to raise corporate taxes even more. This should make for an interesting E-letter.
But before we get into that discussion, let’s take a quick look at last Friday’s third and final report on 2Q Gross Domestic Product.