THE BLOG
03/14/2013 03:17 pm ET | Updated May 14, 2013

Exempting Foreign Profits From Taxes Will Hurt US Economy

At a time when everyone seems to agree we must do more to create jobs in the United States, multinational corporations are aggressively pursuing a stealthy campaign to eliminate taxes on their "foreign" profits. As President Obama reaches out to the business community for support of his legislative proposals, the multinational corporations who apparently control the groups which supposedly represent U.S. businesses will promise support, even for higher domestic taxes on business, if only he will agree to exempt their "foreign" income from U.S. taxation.

Their proposal is called territorial taxation. It was hidden deep inside the Simpson-Bowles proposals, but, more significantly, Dave Camp, the Chairman of the Ways and Means Committee, and a self proclaimed patriotic free market conservative has been proposing going to territorial taxation. Although we already provide tax subsidies for foreign investment, giving multinational corporations a tax exemption on "foreign" profits will significantly increase their incentives to shift even more jobs and profits offshore, hurt the competitiveness of domestic businesses and increase the deficit, even if we cut the expenditures Congressman Ryan proposed, which benefit the middle class.

Under our current tax code, multinational corporations, like Apple and Google, have been able to avoid paying billions of dollars of taxes by shifting profits offshore. Under territorial taxation, multinational corporations would have even more incentive to shift profits offshore because their "foreign" profits would be exempt from U.S. taxation.

Territorial taxation is based on two fallacies: 1) there are American and foreign multinational corporations, and 2) American multinational corporations need more tax subsidies to compete with foreign multinational corporations. The fact is that there is no such thing as an American or a foreign multinational corporation. They are called multinational corporations for a reason. They will invest wherever they think they can make the most profit. If they don't, they are arguably breeching their fiduciary obligation to their shareholders to maximize profit. And, if the U.S. government is going to subsidize investments abroad by exempting those profits from taxation, that is what they are going to do. GE may be an "American" multinational, but it will invest wherever it thinks it can make the most profit.

Of course, such a policy is contrary to the Administration's objective to create jobs in America and will hurt domestic companies that have to pay taxes on their profits while competing against multinationals that don't. Territorial taxation is a serious threat to America's economy. Unfortunately, this stealth attack is gaining momentum because of a very sophisticated and low profile campaign by the multinational corporations.

But no one seems to have noticed. Where are the trade groups that are supposed to represent domestic businesses? Where are the small businesses who are suffering from offshore (and untaxed) competition? Where is the media?

Why aren't we trying to encourage investing in America and creating more jobs here by leveling the playing field? We, like the Europeans, should be moving towards a worldwide apportionment system which would eliminate the subsidization of foreign investment and use of tax havens. Under the simplest apportionment system, if a multinational corporation had 20% of its sales in the U.S., it would pay taxes on 20% of its worldwide profits.

I guess the answer to that question is whether our politicians care more for those who contribute to their campaign or those who care about our economy and want to work.

Martin Lobel is Chairman of Tax Analysts, publishers of Tax Notes, etc. Views expressed are his own.