Obama launches a tax raid

published 5 February 2015

The US administration presented its $4trn annual budget this week. One of the most controversial features was the president's plan to mount a raid on US corporations' foreign earnings. US firms currently pay little or no tax on their foreign earnings until they are brought back to America, where corporation tax is a comparatively high 35%.

The plan proposes a one-off, 14% tax on the $2trn American companies are keeping abroad, using the proceeds to fund $238bn in infrastructure spending. Future foreign earnings would then be taxed at 19%, regardless of whether they are brought back to the US or not. Moreover, US corporation tax should fall to 28% in the future, suggested the administration.

What the commentators said

Obama's plan to tax new foreign earnings at a reduced rate implicitly recognises this, but should "follow this insight to its logical conclusion", said bloombergview.com: just scrap taxes on foreign earnings altogether. US companies would then be on a level playing field with foreign competitors, and would "allocate more capital according to its best uses instead of its tax consequences".

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Some revenue would be foregone, but the money made from taxing foreign earnings is small compared to the effort required to collect the tax. Scrapping exemptions in the corporate tax code, which mean that many companies pay far less than the 35% headline rate, would more than make up the marginal loss.

The wider issue here is that the government wants to make up for the fact that the private sector isn't investing, said Jeremy Warner in The Daily Telegraph. But that's actually largely governments' fault: on both sides of the Atlantic banking regulation has categorised infrastructure investment as high-risk, while capricious politicians create overall uncertainty by threatening clampdowns on certain sectors, as seen with the UK energy sector. Get set for more meddling and money grabs. "Having run the ship aground, politicians now demand to be put in charge of the bridge."

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.