Tax Reform and Easy Revenue: Bob Pozen's Idea

With all the whining about our high statutory corporate tax rates, the effective rates paid by many large corporations are often so far away from the statutory rates as to be laughable. The poster child for this phenomenon is General Electric which, according to the New York Times, posted $26 billion in U.S. income over the past five years, with a net tax benefit of $4.1 billion. 975 GE employees work in their Tax Department, which is headed up by a former Treasury department official.

Let's leave aside the whole issue of comprehensive tax reform, because we came up with a great blueprint in 1986 and seem incapable as a body politic of dealing with this kind of complexity.

Now, we have the problem of U.S. corporations holding more than $2 trillion abroad in non-repatriated cash income from foreign subsidiaries. GE alone is said to have over $14 billion in eligible earnings that could be repatriated. GE had the moxie to suggest companies being able to bring in the cash free of tax, in exchange for creating an infrastructure bank, among other things!

Bob Pozen, Chairman Emeritus of MFS Investments, has a wonderful idea, implementable without a comprehensive reform. His idea, reported on Bloomberg, is to exempt from U.S. corporate taxes income earned in foreign jurisdictions with an effective tax rate of 20% or higher. "Such earnings could be repatriated to the U.S., subject to payment of a 5 percent administrative fee." This fee, which Pozen says is applied in France and other countries, would account for prior deductions from U.S. taxes, primarily for salaries of U.S. executives who helped start and run the foreign operations. Some fraction of 5 percent of $2 trillion. Now that would show the Chinese that we're serious about putting our house in order.

There would have to be a transitional regime, which is relatively simple, as Pozen points out. However, for a variety of reasons, a lot of cash would be brought to the safety of U.S. shores and financial system.

Pozen points out that academic studies show that the average effective U.S. corporate tax rate is around 22.5 % compared to 19.8-21.5% in larger European countries. So, let's turn off the corporate PR machines and make some win-win policy here.

If the Federal government wants to fund an infrastructure bank itself, it will have ample funding to do so under this kind of plan.