Obama's Retroactive Tax Proposal Is Bad Policy
February 4, 2015
President Obama's budget proposal includes a 14 percent tax on corporations' foreign earnings. The problem? It's a retroactive tax. Under current tax law, foreign earnings that are reinvested overseas are not taxed -- they're only taxed when they're "repatriated" (brought into the United States).
The president's proposal would retroactively tax those overseas earnings, as if they had been returned to the United States.
Tax Foundation Economist Kyle Pomerleau calls the tax "the worst of retroactive policy." Why? Corporations made decisions about how to invest their money based on current tax policy. Decades of investment decisions, says Pomerleau, would be subject to taxation. He notes that a retroactive tax is sometimes appealing to revenue-raisers because it doesn't allow economic actors to change their behavior (and reduce their tax liability) in response to new policies. However, creating instability in the tax code with retroactive taxation could deter investment and raise skepticism among taxpayers, hurting economic growth.
Pomerleau makes another important point -- overseas earnings that have been reinvested aren't just sitting around. They've been used to pay for other operations, and money might not be available if the government retroactively imposes a tax. It could force businesses to liquidate their investments, and many might not be able to cover the new costs.
Source: Kyle Pomerleau, The President's Tax on Offshore Earnings Represents the Worst of Retroactive Policy," Tax Foundation, February 2, 2015.
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