USD Law Prof Vic Fleischer Analyzes Obama’s Proposal to Increase Unrepatriated Foreign Earnings in NYT

Professor Fleischer Analyzes Obama’s Proposal to Increase Unrepatriated Foreign Earnings in NYT

Professor Vic Fleischer

New York (February 3, 2015) – Today, The New York Times published and featured a regular Dealbook column by University of San Diego (USD) School of Law Professor Victor Fleischer titled, “Obama’s Budget Seeks International Minimum Tax for Corporations.”

The article analyzes President Obama’s new proposal that aims to save jobs by increasing taxes.

Announced on February 2, President Obama’s fiscal year 2016 budget introduces a one-time 14 percent tax on approximately $2 trillion of so-called unrepatriated foreign earnings. The tax would raise about $248 billion over the next five years, which would be used to help pay for infrastructure projects and replenish the Highway Trust Fund.

The proposal would also impose a 19 percent tax on future foreign earnings (with an 85 percent credit for any foreign taxes paid), allowing such earnings to then be brought back to the United States with no additional tax due.

Under current law, multinational corporations based in the United States are nominally taxed at a 35 percent rate on worldwide income. But the tax does not have to be paid on earnings by a controlled foreign corporation until the company pays a dividend to its United States parent. This encourages American multinationals to shift income offshore, keep it offshore and permanently reinvest the earnings offshore.

Fleischer argues that the White House proposal, by contrast, is neutral as to whether the earnings are reinvested here or overseas or simply returned to shareholders for reinvestment elsewhere in the economy. There is no reason the tax system should encourage corporate managers to create jobs overseas rather than at home.

In the State of the Union address in January, President Obama coupled his proposed increase in the capital gains rate with a proposal to make death a taxable event for wealthy households, precisely to offset this concern about lock-in of previously untaxed assets.

The White House proposal on foreign earnings takes a similar approach, taxing foreign earnings up front and eliminating deferral. Taxing the old “trapped” foreign earnings at a 14 percent rate allows multinationals to repatriate the money and return it to shareholders via a dividend or redemption. Or companies can choose to reinvest the funds in the United States. There would be no restrictions on what a company could do with the repatriated money, unlike some “tax holiday” proposals that would try to force companies not to use repatriated funds to pay dividends or redemptions.

Fleischer states that the plan is to use the revenue from the one-time 14 percent tax to help pay for domestic infrastructure programs and to help replenish the Highway Trust Fund. The money from the one-time tax could be used to reduce the top corporate tax rate in the United States to 25 percent and still have cash left over to, say, reduce payroll taxes or expand the Earned Income Tax Credit, which helps the working poor.

"During the debate about corporate inversions and papered-up transactions that facilitate global income shifting, it is easy to lose sight of the real effects of the current international tax system: the loss of American jobs," wrote Fleischer.

Fleischer concludes that the White House proposal is the right framework to move toward a more rational international tax system.

Read the full article on nytimes.com.

About Professor Fleischer

Victor Fleischer is a professor of law at the University of San Diego School of Law, where he teaches and writes in the areas of partnership and corporate taxation, deals, tax policy and private equity.

About the University of San Diego School of Law

Celebrating 60 years of alumni success, the University of San Diego (USD) School of Law is recognized for the excellence of its faculty, depth of its curriculum, and strength of its clinical programs. Each year, USD educates approximately 900 Juris Doctor and graduate law students from throughout the United States and around the world. The law school is best known for its offerings in the areas of business and corporate law, constitutional law, intellectual property, international and comparative law, public interest and taxation.

USD School of Law is one of the 81 law schools elected to the Order of the Coif, a national honor society for law school graduates. The law school’s faculty is a strong group of outstanding scholars and teachers with national and international reputations and currently ranks 23rd worldwide in all-time faculty downloads on the Social Sciences Research Network (SSRN). The school is accredited by the American Bar Association and is a member of the Association of American Law Schools. Founded in 1954, the law school is part of the University of San Diego, a private, nonprofit, independent, Roman Catholic university chartered in 1949.

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