Tuesday, March 09, 2010

Change: Removing the Shoe, Shooting the Foot

One reason that so many of our jobs have "moved overseas" is because of the way we tax the US corporations who create those jobs. If a US corporation has its operations division here in the US, the corporation is subject to income tax on the profit the people in those jobs produce. However, if the corporation moves those operations overseas, then it can escape the US corporate income tax on those earnings, at least until it decides to "repatriate" those earnings, which may be never.

There is double taxation on corporate earnings, as you may know. (This applies to "C Corporations" not to "S Corporations" which small businesses use.) The income is taxed at the corporate level first. Then, when what is left over of a corporation's earnings is distributed to the shareholders as dividends, the shareholder is taxed. The corporation gets no deduction for what it distributes to the owners. So an earnings dollar is taxed twice, once at the corporate level and once at the shareholder level. By putting operations overseas, however, the US corporation defers indefinitely the tax at the corporate level.

There is change in the air! You might think that the change is to reduce the negative impact of double taxation and encourage US corporations to bring their offshore operations back to the Homeland. Such a thing would surely help the US economy, no?

It would help the economy, but that's not the change that Washington has in mind. For one thing, the tax on dividends will go back up next year. And, for another, and this is big change, there is a movement to tax US corporations on their "worldwide" income, whether or not the US corporation chooses to bring the overseas income back home. Will that bring the jobs back home? Not so much, I think.

How may the tax on a US corporation's worldwide earnings be avoided? Here's an idea, let's not be a US corporation anymore. There's change for you. This is exactly what Rupert Murdock seem to be contemplating with News Corporation. He is moving News Corporation to Dubai. There is nothing in the article at the link about this motive, but my bet is that the prospective change in the US corporate tax system is behind it.

Hardly a great American, one might say of Murdock. But America was built on entrepreneurial spirit and a distaste for taxes. I would say, then, that he is a great American.


Walter said...

isn't Murdoch Australian, actually?

Paul Stokes said...

He is a naturalized US Citizen.