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Tempest in a teapot

Speaker Pelosi is saying that the GAO report that came out this week, indicating that two-thirds of all U.S. corporations pay no tax at all, "highlights the need to revisit tax reform to ensure that U.S. companies pay their fair share of taxes."

Now, I certainly agree about the need for tax reform, and for addressing corporate-level tax avoidance, but not based on the GAO report, which was truly a non-event. The fact that lots of corporations pay no taxes means next to nothing when lots of them may be small companies without significant profits. Even the fact that, according to the report, 25% of fairly large companies paid no taxes, while a bit more interesting, does not immediately make one excited given that we have recently had a bit of a recession.

The finding in the report that foreign-controlled U.S. corporations report lower profits than those that are U.S. owned is a bit interesting, and suggests (as the report notes) that the foreign companies may be using transfer pricing to shift profits out of the U.S. (Or perhaps they haven't been doing well here lately.) But I believe the comparison in the report is to U.S.-owned companies generally. A more interesting comparison would be to U.S.-owned multinationals, since they have roughly the same transfer pricing incentives and opportunities as the foreign firms. In other words, the key here may be multinational enterprise, not whether a company is treated as a U.S. resident or not.

Readers should also keep in mind that, insofar as transfer pricing is hurting U.S. revenues, one of its possible policy implications is that the U.S. corporate tax rate should be lower so the incentive to engage in it will be less. Tougher enforcement is also an option, but transfer pricing is notoriously difficult to do right - since there is no underlying there there - and it also leads to very costly compliance and litigation.

So let's have tax reform by all means (not that I expect it by any means), but intellectual honesty suggests not basing it on the GAO report's supposed findings.

Full post as published by Start Making Sense on August 14, 2008 (boomark / email).