Bring the Profits “Home”

“Home” is in quotes because in today’s globalized business environment, what exactly is a company’s “home”?  Multinationals may be headquartered in one country, manufacture in a second, and sell in a third.   How can a government assess whether a firm’s taxable revenue is in their country or not?

Robert Pozen, a former banker and current lecturer at the Harvard Business school, wrote about the need for a solution in a recent New York Times op-ed.  He wrote:

The current system needs reform: it generates minimal tax revenue while deterring American corporations from using their foreign profits to build facilities in the United States.

His solution is elegant: instead of a one-time tax “holiday”, favored by several firms, why not a permanent fix? The proposal would call for all profits of US-based firms to be taxed at a reasonable rate of 20% (instead of current 35% which leaves many firms leaving funds in overseas accounts to avoid the taxes a the moment of transfer) and if that rate is already being paid where the firm earned the revenue, than that revenue is free to move back to the US.

As I udnerstood it, currently a company, let’s say GM, sells cars in China.  It has pocketed $10 million of sales which is $1 million in profit.  Now, they leave that $1 million in China (or move it to some dubious flag-of-convenience low tax have like the cayman islands) creating some amount of accounting headaches for them and depriving the US society of the tax revenue.  I would like to point out that taxes pay for common goods that benefit GM like roads for its employees to use, military protection for the oil-based economy it depends on, education for its future employees, effective courts and regulation to enable it to protect its legal rights, and so on.  With Pozen’s solution, GM would pay whatever the tax is in China.  If it is around 20% (effective rate, not simply stated), then good for China and GM moves $800,000 in profit to wherever, including possibly Michigan or Tennessee to expand production and, you know, do the economy thing.  If it is around 10% in China, then GM brings back $900,000 to the US and pays $100,000 here to make up the difference.

I imagine many companies would rather have a one time “holiday” and repatriate profits at a 6% rate.  But that smacks of short-termism to me as they will only be right back in the problem of stranded profits overseas.


About Jordi

I am an assistant professor in the Management School at Bucknell University. I specialize in organization theory, social networks, and studying the network society. I have three children, including twins. They love bouncing on the couch, legos, music, and my waffles. My wife teaches English at the same university. I am interested in most things, but these days, networks, social entrepreneurs, the environment, innovation, and virtual worlds. Finding Hidden Abodes and Shaking Iron Cages since 1972
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One Response to Bring the Profits “Home”

  1. jwhite17 says:

    I wonder if it would be more efficient to make a permanent “tax holiday” for bringing oversees revenue into the United States. For example, if the revenue from oversees were only taxed at 10% at a permanent basis, would this allow incentive for the company to bring the profits over? I feel as though a 20% tax rate would be the same as a 35% in its effectiveness in bringing oversees revenues “home.” While I am all for a lower overall tax rate, I feel that there are currently too many loopholes, and I am not sure what lowering the rate to 20% would do on the macro level, but I feel it is too sudden a change and too risky to implement at once.

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