A better way to tax corporations

December 01, 2017

A stated goal of the Republican tax overhaul was to prevent corporations from shifting profits to low-tax countries.

[November 30, 2017 | The New York Times]

Several academic economists, legal scholars and the Coalition for a Prosperous America argued Wednesday that the Republican plan speeding its way through Congress does not sufficiently address this issue.

Daniel Alpert, founder of Westwood Capital and an adviser to the Coalition for a Prosperous America, writes that United States companies “will continue to face competition” from multinational corporations “that will continue to divert their taxable income to tax haven jurisdictions around the world.”

“The GOP congressional leadership and the White House could and should have embarked on real corporate tax reform, that is in the national interest and broadens the tax base while trimming marginal rates.”

In a letter to Congress, the group advocated for the adoption of sales factor apportionment:

“Redefining the source of income is, in our view, the key to correcting the current dysfunction. This is what the sales factor apportionment system, already in use by most US states, does. Corporations earn income from sales. Therefore income should be allocated based upon the destination of those sales. MNC income should no longer be allocated based upon the location of a subsidiary that allegedly earned it. The location of sales is much more difficult to manipulate than the “origin of income” under the current system.

“The US tax base for corporations would be calculated on the basis of a fraction of companies’ worldwide income. This fraction would be the share of each company’s worldwide sales that are destined for customers in the United States. The taxpayer, under SFA, is the whole unitary business, including all evasion-motivated subsidiaries over which the parent corporations exercise legal and economic control.”

“In effect, firms should be taxed on their access to a specific consumer market - from which they generate revenue - rather than on their cleverness at artificially allocating expenses and revenue in tax havens in which their subsidiaries ‘incorporate.’”

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