Offshore tax code needs dose of reform

Congress should swiftly endorse President Barack Obama's proposed crackdown on wealthy individuals and businesses stashing income in foreign tax havens. But a more cautious approach is warranted in reforming laws that permit U.S. corporations to defer taxes on their earnings abroad.

The Obama administration estimates the federal government can collect $210 billion over the next 10 years and prevent more U.S. jobs from going overseas through two major changes in tax law.

The first part of the plan - cracking open secret bank accounts in Switzerland and other notorious safe havens for tax evaders - would generate $9 billion in a decade, according to White House officials.

About 800 IRS agents would be added to bolster efforts, initiated by the Bush administration, to pry loose information from financial institutions in nations that have a long history of shielding U.S. tax evaders. In recent months, officials have secured agreements from Switzerland, Singapore, Bermuda and others to cooperate with U.S. tax investigations.

Besides collecting unpaid taxes, the crackdown also could aid criminal probes of international drug dealers and others who use offshore accounts to launder money. These moves are particularly pressing now, given the state of the U.S. economy.

The second major component of Obama's tax plan isn't as clear-cut. Among other things, the administration wants to place limits on the ability of companies to defer paying taxes on profits earned by foreign subsidiaries.

More than 80 of America's 100 largest corporations take advantage of the setup, according to a study by the Government Accountability Office. The proposed change would bring $200 billion more in taxes, White House officials estimate.

Obama said the measure would stem the flow of U.S. jobs to workers overseas. "It's a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York," he said.

The tax code, indeed, needs an overhaul to try to protect U.S.-based jobs and ensure that businesses aren't gaming the system. Right now, for example, taxes on foreign profits can be deferred indefinitely if the earnings are reinvested abroad.

But Congress and the administration also need to be wary of unintended consequences in Obama's plan.

Not surprisingly, major multinational corporations oppose the proposal. They argue, persuasively, that eliminating deferrals and other breaks for subsidiaries would undermine their ability to compete globally. Most major nations, including Japan and Great Britain, tax only profits earned within their borders.

Some skepticism about the plan comes from unlikely quarters, including the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute. Critics worry the change could lead to the loss of U.S.-based jobs that support foreign subsidiaries and also encourage the sale of the subsidiaries to foreign companies.

Democrat Max Baucus of Montana, head of the Senate Finance Committee, and others have indicated the proposal to limit deferrals is likely to meet the same dead-end fate as past attempts.

But Obama should press the issue. This plan may be flawed, but there's bipartisan agreement that the corporate tax code is overdue for reform. It's time to devise a plan that helps American workers and taxpayers as well as strengthens the global competitiveness of U.S. corporations. The two goals aren't mutually exclusive.