From today's headlines:
President Barack Obama vowed on Monday to overhaul tax policies that he said reward companies for shifting U.S. jobs overseas and allow wealthy people to evade taxes using offshore accounts.
The White House estimated the plan would save $210 billion over the next decade.
In one proposal businesses are poised to fight, Obama would tighten tax-code provisions that allow firms to defer paying taxes on profits they make overseas as long as those earnings are plowed back into the foreign subsidiaries.
Congress is skeptical:
Sen. Max Baucus of Montana, the Democratic chairman of the Senate Finance Committee, said the plan needed further study, even though similar ideas have been around for years.
One of the key disagreements is the following:
[Obama] contends the current system gives companies an incentive to invest overseas rather than creating jobs in the U.S.
"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, N.Y.," Obama said Monday.
But the other side says:
The business community argues the deferral system helps them compete against foreign companies that pay taxes only in the countries where they generate profits.
What if they are both right? That is, in some instances, the current system gives companies an incentive to invest abroad rather than at home. At the same time, however, changing the current system would put U.S. companies at a disadvantage when competing against non-U.S. companies in foreign countries. How do we deal with this problem? One way is this part of the plan, which makes up for the lost tax breaks with new tax breaks:
In exchange for the increased taxes some companies would have to pay, Obama agreed to make permanent a research tax credit that would provide firms about $75 billion in breaks over the next 10 years. The credit currently is to expire at the end of the year.
There's more on this in the White House press release:
3. Making R&E Tax Credit Permanent to Encourage Investment in Innovation in the United States: The resources saved by curbing tax incentives for jobs overseas and limiting losses to tax havens would be used to strengthen incentives to invest in jobs in the United States by making permanent the R&E tax credit.
Current Law
- R&E Credit Is Set to Expire At End of 2009: Under current law, companies are eligible for a tax credit equal to 20 percent of qualified research expenses above a base amount. But the research and experimentation tax credit has never been made permanent – instead, it has been extended on a temporary basis 13 times since it was first created in 1981 – and is set to expire on December 31, 2009.
How It Works
- Through the research and experimentation tax credit, companies receive a credit valued at 20 percent of qualified research expenses in the United States above a base amount. Taxpayers can also elect to take an alternative simplified research credit that provides an incentive for increasing research expenses above the level of the previous three years. Taxpayers may also take a credit based on spending on basic research and certain energy research.
- Any uncertainty about whether the R&E credit will be extended reduces its effectiveness in stimulating investments in new innovation, as it becomes more difficult for taxpayers to factor the credit into decisions to invest in research projects that will not be initiated or completed prior to the credit’s expiration.
The Administration’s Proposal
- Create Certainty to Encourage New Investment and Innovation at Home By Making the Research and Experimentation Tax Credit Permanent: To give companies the certainty they need to make long-term research and experimentation investment in the U.S., the Administration’s budget includes the full cost of making the R&E credit permanent in future years. By making this tax credit permanent, businesses would be provided with the greater confidence they need to initiate new research projects that will improve productivity, raise standards of living, and increase our competitiveness. And with over 75 percent of credit dollars attributed to wages, the credit would provide an important incentive for businesses to create new jobs.
- Paid For With Provisions That Make the Tax Code More Efficient and Fair: This change would cost $74.5 billion over 10 years, which will be paid for by reforming the treatment of deferred income and the use of the foreign tax credit.
I just hope they are keeping in mind WTO rules when handing out these R&E subsidies.
