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The Corporate-Tax Change That Could Raise $114 Billion The Corporate-Tax Change That Could Raise $114 Billion

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The Corporate-Tax Change That Could Raise $114 Billion

photo of Niraj Chokshi
January 9, 2013

Just one tweak to the way the United States taxes corporations could raise $114 billion over 10 years, according to a new report from the Congressional Budget Office, the agency that provides economic analysis to Congress.

All it would take, the agency finds in a new report, is eliminating a rule that lets corporations defer paying taxes on income earned abroad until, and if, it makes its way into the U.S.

“Removing that advantage would reduce tax-based motivations to retain income in low-tax countries and encourage companies to redirect those resources to more efficient uses,” CBO reports. The impact of such a move--raising $100 billion over a decade--would represent a significant step toward the deficit reduction that lawmakers in both parties hope to achieve.

There are two general approaches to corporate taxation. No major country fully embraces either, but many developed countries prefer to tax only income earned within their borders--a so-called territorial approach. The United States prefers to tax income earned anywhere, known as the worldwide approach.

There are downsides to eliminating the tax deferral on income until it returns to the United States, however. It could encourage businesses to move all of their operations abroad. A penalty for doing that--for reincorporating somewhere else--could discourage the practice, but nothing would stop an emerging company from deciding it would be better to set up shop in another country.

“A more worldwide system could encourage emerging businesses to choose foreign incorporation without fear of inversion penalties,” the report notes. Still, CBO finds that eliminating the deferral would generate more revenue than any of the other policy options considered in the report.

Some big-business lobbying groups used the tax debate this fall and winter to push for corporate tax reform, and they are continuing their calls for a shift to a territorial system, which they argue would provide U.S. companies a  more level playing field.

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