Democrats currently have the H.R. 4213, the “American Jobs and Closing Loopholes Act of 2010,” better known as the Extenders Bill, up for consideration in the Senate, and as a part of the bill’s myriad tax changes, it includes eight significant international tax increases. While this has not been the keynote issue with the bill, Democrats have been attempting to sell the increase as a way to curb the excess profits of big business, and they have been using this as an electoral weapon. As The Wall Street Journal reported, “Within minutes of a House vote last week on a bill that included a small portion of the corporate tax increases, Democratic campaign officials had sent out 20 press releases, criticizing vulnerable Republican incumbents, including Rep. Charlie Dent of Allentown, Pa., and Rep. Lee Terry of Omaha, Neb., for opposing the measure.”
Now, this would normally constitute good politics, were it not for the fact that Democrats seem not to understand their own tax provisions. According to the Journal,
“Democratic critics say loopholes in the current tax system unfairly enrich U.S. companies, while encouraging them to invest profits offshore, leading to job losses in the U.S. They want to pare back many of the system's specific breaks….In some cases, they say, American taxpayers are effectively subsidizing multinationals' payments of taxes to foreign governments.”
Given that the US system taxes income made anywhere in the world by US citizens or corporate entities and given that foreign countries also levy taxes on money made in their country, a US company with operations or subsidiaries overseas might be liable in that overseas jurisdiction for the money made there, and then be liable again on that same money in the US. In order to prevent this anti-competitive “double taxation” of income, it has become commonplace in international tax law to offer a tax credit for foreign taxes paid. Democrats may call that “effectively subsidizing multinationals' payments of taxes to foreign governments,” but if not done, American firms cannot hold their own against foreign competition.
Moreover, what Democrats seem to have missed in their own legislation is that their tax hikes they propose both encourage US firms not to bring capital back to benefit US shareholders and employees and also give companies more reasons not to remain US-domiciled companies. All the major changes in their proposals limit the amount of foreign taxes that a US firm can claim on their own taxes, which leaves those companies paying taxes twice on the same money. While Democrats cite problems with the present code, they seem to be criticizing their own propositions.
For more information, read the ATRF analyses of the proposed international tax hikes in the Extenders Bill.