New Treasury Department rules demonstrate need for Tax Reform

The Treasury Department issued new rules and regulations this month making it more difficult for American-based multinational companies to avoid paying U.S. corporate taxes. Commonly referred to as corporate tax evasion, U.S. based-companies operating in multiple countries often time allow themselves to be acquired by foreign companies with lower corporate tax rates.

President Obama defended the rule changes stating, “We’ve had another reminder in this big dump of data coming out of Panama that tax avoidance is a big, global problem. It’s not unique to other countries. A lot of it is legal, but that’s exactly the problem. It’s not that they’re breaking the laws, it’s that the laws are so poorly designed.”

While our tax laws may be poorly designed, the President is missing a significant reason businesses engage in corporate tax evasion – the U.S. corporate tax rate is the highest in the developed world! Our corporate tax rate is almost 15 percent higher, on average, than the rest of the developed world. Of course businesses will attempt to avoid paying higher taxes.

In addition to high tax rates, U.S. businesses operate under a worldwide tax system rather than a territorial tax system like most other countries. This means U.S. profits earned overseas is double-taxed – once by the foreign country and a second time by the U.S. This further incentivizes American businesses to register in foreign countries so they are taxed only once.

If legislators are serious about addressing corporate tax evasion and strengthen our economy, they should propose comprehensive tax reform that moves us to a territorial system and lowers both corporate and individual tax rates so small and large businesses can thrive.

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