Amidst all the news about Burger King – another company renouncing its US "citizenship" to avoid paying taxes for the roads, courts, police and the rest of the government services that made them prosperous – an idea that Campaign for America's Future has been promoting is gaining traction. The technical name for it is "Single Sales Factor Apportionment" but it just means tax companies based on how much they sell here.
In the post, "A Simplified Way To Tax Multinational Corporations," I discussed a report by District Economics Group economist Michael Udell that "offered a bold new alternative that is so radically simple that even the most clever corporate tax accountant would have a hard time finding a way around its fair and universal proposition: If a company sells products or services in the U.S., it must pay taxes on the U.S. proportion of its worldwide sales."
In other words, instead of expecting companies to tell us how much profit they make inside and outside of the U.S., we'd just tax all companies – U.S. or not – based on what they sell here. So if a company makes 25 percent of its sales revenue here, we'd tax them based on 25 percent of their worldwide profits. This way it won't do them any good to engage in schemes to make it appear as if their profits are made outside of the U.S., and it won't do them any good to become non-U.S. corporations.
On Tuesday, Howard Gleckman at the Tax Policy Center amplified this idea. In "Could The U.S. Fix Taxation of Multinational Corporations With A Sales-Based Formula?" Gleckman wrote about the report and the idea of this new way to tax corporations:
The good news is the tax inversion flap has generated some interesting ideas for broader changes in the way we tax multinational firms. One, raised in a July paper published in Tax Notes by Mike Udell and Aditi Vashist, would base a firm’s U.S. taxable profits on the U.S. share of its total worldwide sales.
Under such a system, called single sales factor apportionment, a multinational would report income for all its worldwide entities and be taxed on a share of its total worldwide profits. But the tax would be apportioned by the percentage of the firm’s worldwide sales that occur in an individual country. For instance, if half of a firm’s sales occurred in the U.S., half of its worldwide profits would be subject to U.S. tax. The levy would apply to all corporations, whether based in the U.S. or elsewhere.
What It Does For Us
The Udell report discusses how adopting this sales factor apportionment proposal could:
- Redefine the corporate tax base, permitting lower rates, increased revenue or some combination of both.
- Remove the incentives for U.S. multinational corporations to leave the U.S. through corporate inversions, and to leave their profits in offshore tax havens.
- Level the playing field between purely domestic businesses and multinational corporations.
- Reduce tax incentives to locate jobs and manufacturing operations in lower tax foreign nations, bringing opportunities for economic activity to the United States.
- Maintain Congress’ ability to lower rates or increase revenue to execute policy.
- Simplify accounting and reduce the burden of compliance on corporate taxpayers as well as administrators.
A key reason this idea will work is that companies have an incentive to accurately report their worldwide sales and worldwide profits: They need their shareholders to know these numbers and don't want to underreport them – or executives won't get their bonuses. Governments won't have to worry about companies fudging the numbers so that they are not all getting the same, accurate information. This would align U.S. tax enforcement interests with corporate interests in putting their sales totals in the best possible light.
It also negates the incentives to renounce U.S. corporate citizenship, because they will pay the same amount in taxes whether they leave or not.
Take a look at “Single Sales Factor Apportionment of Global Profits to Broaden the Tax Base” by District Economics Group economist Michael Udell and Aditi Vashist.