Taxing Multi-National Companies

We have a problem with multi-national companies “recognizing” their profits in countries where they will pay few if any taxes, while avoiding recognizing profits where their business is. United States tax laws allow companies to only pay taxes on those profits “made” in the US, or repatriated to this country. Given that, companies play games with how they recognize profits, and they certainly don’t intend to repatriate the money to this country.

One of the ways they do this is to play with ‘transfer pricing’. When one part of the work is done in one country, and another part is done in another, the company can arbitrarily decide what price one part of the company will “charge” another part. They set the pricing so the part of the company with lower taxes makes most of the profits. They also will move the headquarters for the company or a subsidiary to a country with lower taxes.

As a result, the US collects fewer corporate income taxes as a proportion of total taxes than it did any time since World War II. By one accounting, eight US technology companies between them have parked $2.1 trillion in profits overseas to avoid US income taxes. Why should we care? Because that increases the US budget deficit and makes it harder to pay for US military, roads, bridges, police, education, etc.

How can we deal with this problem? Perhaps we should no longer allowing companies to arbitrarily set transfer pricing to hide profits, for one thing. For tax purposes in the US, they must have revenues and profits proportional. So if they have $200 million in sales and $20 million in profits, with $100 million of their sales in the US, then $10 million of their profits would be taxable here. Maybe we should also make companies with overseas headquarters ineligible for certain US government contracts.

Ordinary taxpayers – you and I – are subsidizing highly profitable corporations. This is unfair and should not be allowed to continue. Beyond that, it makes it more advantageous to ship US jobs overseas where they can pay the workers less and increase the profits further.