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Kass: Addressing the Fiscal Cliff

The alternative proposition from President Obama is the international minimum tax. Under this proposal, all income of U.S. corporations must be immediately taxed, either by the U.S. or some foreign country, at a rate greater than or equal to this as yet unspecified international minimum tax rate. If a corporation reported profits in a country that collects no corporate tax, the U.S. would immediately tax those profits at the international minimum tax rate. This would help reduce the appeal of the tax haven, according to Brookings.

Very few people actively support the current system of taxing the foreign profits of U.S. corporations. A combination of the two systems would provide the best compromise: a territorial tax system for the valid tax-collecting nations and the international minimum tax rate for those that collect little or no corporate tax (e.g. the Cayman Islands). At this point in time, however, compromise is a four-letter word in Washington, D.C. Sen. Sanders' new legislation proposition is a good start toward addressing the tax dodging of U.S. companies.

What is the logic of this tax dodge by some of country's largest companies?

Seagate's (STX) Brian Ziel's explanation in 2004, which is commonly stated by other corporations as a rationale for overseas subsidiaries that do not pay U.S. federal taxes: "The competitive benefits relate both to taxes saved on certain income earned outside of the United States and the ability to efficiently deploy assets around the globe to remain competitive" (Bloomberg).

As I wrote in Barron's Other Voices last year, the average American has been the victim of screwflation over the last decade. Corporations have prospered and have increased their share of GDP at the expense of the middle class, which has seen its wages and salaries stagnate while the cost of the necessities of life has steadily increased. Those large U.S. corporations that have opportunistically reduced their tax bills through Cayman Islands subsidiaries and other schemes are the same companies that have sliced fixed costs (and have recently achieved 57-year highs in profit margins) by paring down payrolls and utilizing temporary employees in place of permanent ones.

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