This week, the Greenlining Institute released a study slamming tech companies for keeping a substantial portion of their assets overseas. According to the study, American tech firms held $430 billion in cash off American shores, an increase of 21 percent since last year. All told, $1.4 trillion in assets are held overseas, and the tech sector represents about 30 percent of it.
Assuming the study’s numbers are accurate, it’s completely understandable and it’s justified. The blame should not be laid at the feet of tech companies, but at the feet of the IRS. The U.S. is the only nation in the developed world that taxes income earned overseas by its own taxpayers. For example, a French tech firm would pay tax on profits earned in the U.S. to the IRS, but wouldn’t pay taxes on those same profits in France. In direct contrast, Uncle Sam taxes American companies on their global profits. If an American tech company earns income in France, they would pay French taxes and then pay the IRS the difference between the French and American tax rate.
Our system of global taxation effectively shackles any multinational American business with a marginal corporate tax rate of 35 percent – 39.2 percent if you count the average state corporate tax. This is only made worse by the fact that as of this month, the U.S. has the highest corporate income tax rate in the developed world, while everyone else collectively averages 25.5 percent.
Today’s marketplace is almost entirely global and especially so in the tech sector. Yet, our government has myopically failed to consider a market beyond it’s own shores, and that worldview is ironically holding back tech investment and job creation at home. As a result of our anti-competitive tax system, American companies are forced to hold their earnings in foreign accounts and subsidiaries to remain competitive with their foreign counterparts.
The Greenlining Institute decries that the effective tax rate for the top 30 tech firms averaged 16 percent last year, resulting from tax credits, deductions, and profits stored beyond our borders. But such business-bashing is ignorant to the fact that low tax rates are necessary to stay competitive in a global market where non-American firms enjoy much lower rates. The actions of individuals – and the businesses they run – are akin to water: people will always find a way around the boulders that government throws before them in order to accomplish what is in their best interest.
To solve the problems that result from global taxation, the study doubles down on the failures of the current system: more laws preventing companies from claiming foreign tax status or bringing profits back without excessive taxes. But with what aim? The study notes that tech companies created over 58,000 new jobs during the recent recession and argues that the punitive tax won’t impact job creation. But if American tech firms are going to bring money home, forcing them to hand much of it to the IRS certainly doesn’t boost job growth any more than allowing them to keep it all without the extra, punitive tax. Proponents of our global taxation scheme have no care whether the $430 billion goes toward job creation, higher pay to workers, R&D research, or the myriad of other ways it can be spent in the tech sector. They just want the IRS to get its hands on some of the cash first.
An easier fix for repatriation would be an end our global taxation system. One solution is embodied in H.R. 1834, the Freedom to Invest Act, which would enact a one year window for companies to bring money home at a reduced tax rate. Beyond that, we should move to a territorial tax system along with broad tax reform that eliminates credits and deductions, while lowering the corporate tax rate by an equal margin that puts us on par with the rest of the developed world. Only then would American tech firms be on a level playing field with their international competitors in perpetuity – and have no reason to leave their assets overseas in the first place.