A Professional who cares..About YOU!
A Tax Plan to Stimulate the Economy and Reduce Federal Debt
by Andrew C. Powers. Mahopac, NY
Under the existing U.S. tax law, in many respects it is economically punitive to repatriate accumulated earnings and profits (E&P) held by a controlled foreign corporation (CFC), particularly if the statutory and effective tax rates of the country that the foreign entity is incorporated in is less than the U.S. rate. At a time when the U.S. is suffering high unemployment, deficit spending and substantial debt, it is estimated that CFCs hold approximately $1 Trillion in untaxed cash that can be repatriated to stimulate the U.S. economy. But a tax incentive is needed for this to make prudent business sense.
While our elected representatives and the Executive Office continue their partisan debates and scratch their heads waiting for a sign from their political party leaders as to what they should do, I have a plan that, although we are too far gone for any one plan to work, if properly initiated can help reduce our national debt and stimulate our economy by creating jobs in the U.S. The plan is simple, and in order to work it must remain simple (the KISS formula):
1. Enact tax legislation effective immediately that any foreign E&P held by a CFC can be repatriated at a reduced rate of 10% after Section 78 gross up and being offset by any qualifying foreign tax credit (Section 78 of the Internal Revenue Code <IRC> requires, in simplistic terms, that foreign tax paid on the E&P be added back before it is taxed by the U.S. which can then be reduced by any qualifying foreign tax credit. Thus if $1 Trillion of untaxed E&P were repatriated to the U.S. this would generate $100 Billion in U.S. tax revenue.
2. The income tax paid that is attributable to repatriated E&P go to a special fund used to pay national debt within 6 months of being collected. It cannot go to the U.S. general fund or be used for any other purpose other than national debt repayment. Furthermore it would be required that the debt being paid be prioritized as first going to debt held by foreign lenders as a matter of national security.
3. An Investment Tax Credit (ITC) be re-enacted for a 36 month period, providing for a 10% ITC on qualifying investments. The definition of a qualified investment would include:
a. The ITC would only be available to corporations that took advantage of the CFC repatriation incentive.
b. The investment had to be made in an active trade or business located within the U.S. that created new jobs. The cost of newly hired employees would be considered as a qualifying investment as would be the first year specialized training of existing personnel working in a new line of business.
c. Qualifying assets would include only those substantially manufactured in the United States.
d. An additional credit would be available for the purchase and utilization of equipment that can be shown to increase efficiencies in product development thereby increasing gross revenues.
e. Documentation substantiating the investment would be required to be submitted with the annual corporation income tax return which would be filed in one IRS office designated to review this documentation. This required documentation must include a valid Form I-9, certified by an officer of the corporation, evidencing that the qualifying investment included only the cost of employing persons legally eligible to work in the United States. Corporations claiming the additional credit for enhanced efficiency equipment would need to substantiate an increase in production and sales revenues (and as a result net taxable income) over a three year period.
f. No special restrictions or burden would be placed on the corporation as to what type of business or technology qualified for investment or the ITC. Should Congress wish to provide an additional tax incentive for investment in Green Technology it may do so by increasing the amount of the credit; however use of the credit cannot be restricted to any one industry. The choice must be left to the business managers.
The original IRC 48 Investment Tax Credit. IRC Section 48 was enacted and codified in 1962 and provided a 7% ITC intended to further stimulate an already robust economy and to reduce unemployment. The credit was later increased to 10% in 1978 but repealed as part of the revamped Internal Revenue Code of 1986. The theory behind this credit is that by providing an incentive to restore product development in the U.S., it will generate employment opportunities both for the company enjoying the credit as well as the company producing the equipment purchased by that corporation. The more Americans who are employed, the greater the income tax revenues collected by the U.S. as well as increasing net disposable income which would further stimulate the economy including the recessed housing market as well as having a positive affect on the U.S. Gross Domestic Product index and trade balance.