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Padden: Tax Code Hurts Firms That Keep Jobs in U.S.

I am a card-carrying Republican who thinks that the deferral tax “loophole” is bad policy for two reasons: It rewards companies for moving property and jobs overseas, and it is unfair to corporations that keep jobs in the United States and then must shoulder a disproportionate share of the cost of government.

Some argue that the U.S. worldwide tax system should be changed to a territorial system. The theory of the current worldwide system is that all income of a U.S. resident company will be taxed here.

Under a territorial system, only income generated in the United States would be taxed.

In reality, the U.S. worldwide tax system does not tax all income of U.S. companies. The United States has a “deferral regime” under which U.S. tax on foreign income can be completely avoided if companies do not repatriate the money and are able to steer clear of the “anti-deferral” rules.

The poster child for this tax avoidance regime is General Electric Co.

GE is a great American company with great leadership, but the tax provisions it exploits drive jobs overseas and penalize companies that keep their jobs here.

GE’s Form 10-K Annual Report for 2010 shows that its effective tax rate is 7.4 percent, significantly below the U.S. corporate tax rate of 35 percent.

The driving force behind this low tax rate is the fact that GE has established business operations and hired workers in foreign countries. For example, GE just moved its health care headquarters to China.

Those foreign operations have generated earnings of $94 billion, which GE has parked offshore under the U.S. deferral regime and on which it pays no U.S. taxes.

And GE will never pay any U.S. tax on that amount unless and until the funds are paid back to the U.S. as dividends.

Now let’s compare the Walt Disney Co., from which I retired in January. Disney’s most recent Form 10-K shows an effective tax rate of 34.9 percent — dramatically higher than GE’s. The reason is that unlike GE, Disney has kept its income producing property and its jobs in the United States.

Disney’s U.S. companies hire workers to create films and TV shows here and keep the ownership of those films and shows in the United States.

And while it is true that Disney distributes its properties in foreign countries and generates foreign income, that income is brought back to the United States in the form of royalties on which Disney pays full U.S. tax.

The tax code provisions that reward GE for moving jobs offshore and penalize Disney for keeping its jobs here in America are indefensible.

This comparison shows the perverse effect of the high U.S. corporate income tax rate and the existence of the deferral regime.

Every major country in the world except Japan has an income tax rate lower than the U.S. rate of 35 percent, and Japan has proposed lowering its rate.

The higher U.S. rate provides incentives to move operations, jobs and income to lower-tax foreign countries. The deferral regime rewards this offshoring of business and jobs by permanently deferring U.S. tax on the foreign profits from those operations.

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