Congress is focusing, once again, on businesses that have used smart planning in order to avoid the excessive United States corporate and personal tax rates as well as the extremely complex compliance costs. Instead of focusing on how to lower US taxes and make tax compliance easier and less expensive, the US Senate is now picking on Caterpillar as a so-called “tax dodge”.
The US has extremely high corporate tax rates of 35%. This means if a corporation makes a $100 profit, it pays $35 federal tax (plus State tax which could be 10% or higher). The remaining money when distributed to the shareholders gets taxed again at the shareholders rate which could be up to 39 1/2% plus State tax. So for example $100 of earnings would be $35 of federal tax, $10 of State tax leaving $55. The $55 would be taxed at the individual level with a combined federal and State tax of approximately 50% yielding about $28 on an earnings of $100. No wonder businesses are trying to do everything possible to avoid this horrible tax scenario.
On top of it, there is the high cost of IRS audits. Unlike individuals and small businesses where audits, although painful, can be contained, large businesses suffer year in and year out audits that end up costing them large dollars and in internal staffed to prove that their tax return is correct. In addition they have to pay tax attorneys and accountants and other professionals.
This convergence of high tax cost and high compliance court’s has resulted in the US being uncompetitive. No matter what studies Congress will try to show to prove whatever they want, the fact is major corporations are moving intellectual property outside of the US primarily for tax reasons and compliance reasons. We are world economy and Congress needs to recognize this.
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