This is rather a stop the presses moment. We need some film of the young newspaper boys shouting "Extra, Extra, Read all about it!" in the street: for Robert Reich has managed to come up with a sensible economic idea. This is in the context of corporate taxation and the way that the US system is becoming ever more out of step with taxation systems in general in other parts of the world. His idea is:
Rather than focus on the newly-fashionable tax-avoidance strategy of changing corporate nationality, it makes more sense to tax any global corporation on all income earned in the United States (with high penalties for shifting that income abroad), and no longer tax “American” corporations on revenues earned outside America. Most other nations already follow this principle.
It's not quite true that most other nations already do this although it is true that some do and more are moving towards it. It is however highly sensible which is why we should celebrate Reich proposing it.
The current US corporate taxation system already taxes companies working in the US on the profits they make in the US. So there's no actual change there needed. That US system also presumes to tax foreign profits made by US domiciled firms: this is why so many are talking about those inversions in order to avoid that taxation. But there's a wrinkle in this, in that a US company can declare that it's never going to bring those foreign profits into the US: they will be indefinitely reinvested outside the US. At which point the US corporate income tax does not have to be paid upon them. And that's something of a problem as many companies are doing just that: keeping those foreign profits in foreign forever. There's some $1.8 trillion ( a little higher than Reich's $1.6 trillion, at least from the last numbers I've seen) in such profits being held offshore.
The problem with this is that that's obviously $1.8 trillion that's not being invested in the US economy. Given that we actually rather like people investing in the US economy, for that's what will make it grow in the future, we would prefer some manner of persuading the corporations to bring it on home. Not taxing those profits would do very nicely.
I can already hear people gearing up for the riposte: but the corporations wouldn't invest this, they'd just pay it out as dividends to shareholders! And yes, they almost certainly would: and that's exactly what we want them to do anyway. I've always been very confused that those who opposed the tax repatriation vacation (US corporations were allowed, for a limited time, to bring such foreign profits back and pay a lower tax rate) of a few years ago keep making this argument. For we know very well that large corporations, those with these cash piles, are not cash constrained in what they can invest in. That's why they have those cash piles of course. But there's myriads of small and new businesses out there that are cash constrained. So, what we'd really like to happen to these corporate cash piles is that they get cycled out of the large corporations and into those small and new ones. Which means giving the money to stockholders who then go an reinvest it (or consume it, we'd like some fiscal stimulus as well). Money paid out as such dividends is not wasted, it's exactly what we'd like to see happening.
So, all in all Reich has a good idea here. In the jargon he's suggesting that the US corporate taxation system should move to being a "territorial system". Which will do very nicely until we do the right and proper thing by that corporate taxation system which is blow it up entirely and simply tax the returns to investments just like any other income. Just don't tax at the corporate level at all but tax investors on what they receive in dividends and or capital gains: just as we tax investors on the interest they receive from bonds. Until that happy day a territorial tax system will be a reasonable advance on what we've got now.
