Off the Charts Blog | Center on Budget and Policy Priorities

U.S. corporations have lobbied aggressively in recent years for both a temporary tax holiday under which they would bring their foreign profits back to the United States and pay a much lower tax on them, as well as a permanent exemption of foreign profits from U.S. taxes (known as a “territorial” system).  This week’s headlines about Apple’s reported use of offshore subsidiaries to lessen its U.S. tax bill have renewed the debate over these flawed ideas.

Multinational companies like Apple currently have a strong incentive to defer U.S. corporate taxes by shifting and keeping profits overseas (see chart).  As we’ve explained, a territorial system would create greater incentives for those companies to invest and book profits overseas rather than at home — and that, in turn, risks reducing wages at home by encouraging investment to flow overseas, increasing budget deficits by draining revenues from the corporate income tax, or raising taxes on smaller companies and domestic businesses to offset the revenue loss.

Now, policymakers have begun to focus on the issue.  The Senate Permanent Subcommittee on Investigations has issued a report that highlights the tax planning gymnastics that companies undertake to shift profits to overseas tax havens in order to avoid U.S. taxes.

Armed with more information about how these incentives are creating unfair advantages for multinationals and draining much-needed tax revenue, the President and Congress should resist the lobbying campaign and instead focus on reducing the incentive to shift profits and operations overseas.

The paper on tax reform options that the Senate Finance Committee issued yesterday includes CBPP’s proposal for a renters’ tax credit to help the poorest families afford housing.  Such a credit would be a valuable complement to the existing Low-Income Housing Tax Credit (LIHTC).

Here’s why.

A renters’ credit would help rebalance the nation’s housing policy, as well as its housing-related tax subsidies.  The federal government spends more than $200 billion annually to help families pay for housing.  But the bulk of that goes for homeownership tax subsidies (like the mortgage interest deduction) that favor higher-income families, most of whom could readily afford homes without assistance.

Meanwhile, growing numbers of low-income people pay very high shares of their income for rent, as the graph shows.  This forces them to divert resources from other basic needs and places them at risk of housing instability or homelessness, which can cause long-term harm to children’s health and educational outcomes.

Sharp cuts to federal rental assistance under the sequestration budget cuts, together with the 2011 Budget Control Act’s tight caps on annual discretionary funding, will leave even more families struggling to afford housing.  A renters’ credit would address some of these pressing needs.

For two reasons, the renters’ credit should complement — not replace — the LIHTC, which policymakers created in the 1986 tax reform law to support the development and renovation of housing affordable to families with incomes roughly double the poverty line.

First, the LIHTC does not by itself typically make housing affordable to the poorest Americans, such as low-wage workers and the lowest-income elderly people and people with disabilities.  The renters’ credit would help these households afford rents in developments subsidized through the LIHTC and in other buildings.

Second, before creating the LIHTC, policymakers had long struggled to establish efficient, accountable subsidies for construction and renovation of affordable housing, an important need in many areas.  The LIHTC has performed well in this role, though it could be made even more effective.

Policymakers should streamline inefficient housing tax expenditures, such as the mortgage interest deduction, to better achieve their goals and generate revenues to contribute to balanced deficit reduction.  They should also use a portion of the savings (after meeting deficit-reduction needs) to address growing hardship among low-income renters by establishing a renters’ credit to complement the LIHTC.

With Mother’s Day approaching and policymakers considering overhauling the tax code this year, it’s worth noting that two key tax credits for low-income workers lifted 2.3 million mothers out of poverty in 2011 (the most recent year available), using a Census Bureau poverty measure that counts tax credits and government benefits.

Our new fact sheet gives state-by-state figures on how many mothers in working families benefit from those credits — the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).

The EITC and CTC not only help working parents make ends meet but are proven, powerful tools for reducing child poverty — lifting 4.9 million children out of poverty in 2011 — and advancing children’s long-term well-being.  Children of EITC recipients, for example, tend to do better in school, are likelier to attend college, and earn more as adults, research shows.

For more, see our backgrounders on the EITC and CTC.

The Senate Finance Committee will release the fifth of its tax reform option papers later today, this one on international taxation, Tax Notes reports.  Here’s why that’s important.

Among its options the committee will likely list is a move toward a “territorial” tax system that exempts or largely exempts the foreign profits of U.S.-based multinational corporations from U.S. tax.  As we’ve explained, that would create greater incentives for those companies to invest and book profits overseas rather than at home — and that, in turn, risks reducing wages at home by encouraging investment to flow overseas, increasing budget deficits by draining revenues from the corporate income tax, and raising taxes on smaller companies and domestic businesses.

We’ve also explained that as they examine international reform, policymakers should consider:

• The need to lessen the current foreign tilt of the tax code and growing tax avoidance by multinationals (see chart);
• The Organisation for Economic Co-operation and Development’s warning about growing tax avoidance by multinationals that undermines competition; and
• The fact that even a less than “pure” territorial tax system — that is, one that has safeguards against inappropriate profit-shifting to overseas tax havens — carries serious risks.

As our paper describes, a better first step on international tax reform would be President Obama’s fiscal year 2014 budget proposals to reform international taxation, which would reduce incentives for corporations to shift profits and investments overseas and raise $157 billion over ten years.  A key provision would prevent companies from deducting their interest expenses associated with loans that support overseas investments as long as they are deferring U.S. tax on the income that those investments generate.

Starting at 11:45 a.m. Eastern Time today, CBPP Senior Fellow Jared Bernstein will debate the Tax Foundation’s Elizabeth Malm at North Carolina State University on how the tax reform debate in North Carolina fits into the broader national discussion on economic growth.

Click here to watch the debate live.

Related Posts:

• Swapping State Income Taxes for Bigger Sales Taxes Would Make Tax Systems Even Less Fair
• Economics of Risky Tax Proposals Don’t Add Up
• Top Five State Tax Charts