Obama's $4 trillion budget eyes $270 billion in overseas tax earnings

news
03 February 2015

US President Barack Obama's $4 trillion budget proposes a 19-per cent tax on US companies' overseas earnings, which is estimated to bring in about $270 billion annually over the next 10 years.

US President Barack ObamaAmong the new tax proposals is a one-off 14 per cent tax on US profits made overseas, as well as a 19-per cent tax on any future profits as they are earned.

No tax is currently levied on foreign profits of US firms as long as they are not brought into the US. It is estimated that nearly $2 trillion of foreign earnings made by US firms abroad goes untaxed.

''This is part of a plan to reform the tax system. So on a going-forward basis, you would have a 19-per cent minimum tax on all the earnings of foreign subsidiaries of US corporations,'' Obama's top economic advisor Jason Furman told a news conference. Obama is making the new tax mandatory for all overseas operations of US companies, he added.

The $4-trillion budget that President Obama sent to Congress proposes significant tax rises, primarily on firms and the wealthy, which could be used to remove current budget caps and fund infrastructure projects, and significant tax relief for the middle-class.

The budget proposes a series of tax reforms, including an increase in the top tax bracket for capital income to 28 per cent, from 23.8 per cent, and closing a loophole that permits heirs to avoid taxes on capital gains.

However, the corporate tax rate within the US would drop from 35 per cent to 28 per cent, aligning more closely with other industrialised nations.

Obama`s budget for fiscal year 2016, which begins on 1 October, comes in at $3.999 trillion - about 21.3 per ent of gross domestic product, up from the current year`s 20.9 per cent.

Some 70 per cent of the spending is obligatory, as it covers public safety net programmes such as social security and health coverage for the elderly (Medicare), as well as debt servicing.

The "discretionary spending" is $1.168 trillion, divided equally between defence and non-defence programmes.

Obama wants to expand affordable child care, in part by tripling the child care tax credit, making it eligible for families making up to $120,000 annually. The change would help some 5.1 million families

He also proposes a "Preschool for All" initiative.

He also proposes to make tuition at two-year community colleges free for many students.

A total of $585 billion has been set aside for military spending, while $53.4 billion is meant for State Department programmes and other international operations.

The defence budget marks an increase of more than four per cent over 2015, but is 24 per cent lower than in 2010, when adjusted for inflation.

Operation Inherent Resolve, the mission targeting the extremist Islamic State group in Iraq and Syria, is funded at $5.3 billion.

Assistance to Ukraine, aimed at "countering Russian aggressive acts," comes in at $117 million, in addition to the $1 billion loan guarantees provided to Kiev last year and a similar forthcoming loan in 2015.

Fourteen billion dollars has been  set aside to counter cyber-attacks, while $70.2 billion is directed to Veterans Affairs programmes, a hike of 7.8 per cent.

"Built by far-sighted investment over generations, America`s world-class infrastructure is falling behind the rest of the world," the budget statement acknowledged.

Obama has sought $478 billion over six years to make significant repairs and to build new bridges, roads, and railways. The programme aims to speed infrastructure permitting and expand public-private collaboration on such projects.

While the overseas tax in effect would be a tax on citizens of other countries, US industry, especially the IT industry, and the Republican leadership have opposed the move to tax overseas earnings, saying it is be bad for global competition of US companies.

''The proposal to tax companies' overseas earnings, rather than making our tax code simpler and more competitive through reform, is an area that gives us significant pause,'' the Information Technology Industry Council (ITI), president and CEO Dean Garfield said in a statement on Monday.

''Today's dysfunctional tax code traps nearly $2 trillion in sales revenue overseas instead of putting that money to work here growing businesses and hiring people,'' he said.

''We urge the Administration and Congress to give our broken tax code a complete reboot so that our innovative technology companies can continue to drive America's economic growth by leading the global marketplace,'' Garfield said.

Noting that Obama is right to focus on economic growth and job creation for the middle class, ITI said, that his approach is wrong.

''Certainly, focusing on STEM education programs, smart infrastructure projects to build a modern transportation system, and fixing our broken immigration system would drive undeniable economic benefits for the country,'' he said.

''The Budget closes loopholes that perpetuate inequality by allowing the top one per cent of Americans to avoid paying any taxes on their accumulated wealth and uses that money to help more young people go to college,'' he added.

Congressman Charles W Boustany said that the President's new plan to finance roads and bridges is problematic because of its high rates and immediate effective date, denying businesses the ability to plan ahead with a phase-in period.

''This will weaken American competitiveness and encourage more American companies to relocate to more favourable tax environments abroad. We need comprehensive tax reform that will lower overall corporate rates and encourage growth, not a six-year band-aid that won't fix these problems in the long term,'' he said.





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