Few are paying attention, but a proposal now working its way through Congress could change the U.S.’s whole approach to trade, industrial policy and taxation. The plan would exempt income earned on exports from corporate taxation. Today, corporations pay federal taxes on the profits they make from goods and services sold overseas; only the location of the company’s headquarters matters. Under the new proposal, taxes would be based on where the sales are made. The Republican plan also cuts the top corporate tax rate from 35 percent to 20 percent and limits the deductibility of interest expenses, among other changes.
The switch in the location of taxation is the most important change. First, it would crack down on tax havens. By moving its headquarters to a country with a low or zero corporate tax rates -- Bermuda or the Cayman Islands -- a company now can avoid U.S. taxes by holding cash offshore until it’s ready to repatriate it. This results in lost revenue for the federal government, and also incentivizes corporations to sit on cash instead of investing it in the U.S.
