TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

The Wall Street Journal on Obama’s plan to reduce foreign income deferral:

Yes, we know: Few major U.S. companies pay 35% of their profits in taxes because of the foreign tax-deferral and other deductions, credits and loopholes. But that’s precisely why Mr. Obama should want to take the better path to corporate tax reform by reducing the rate and removing loopholes. America now has the worst of both worlds — a high statutory rate and a tax code so riddled with complexity that it is both expensive to administer and inefficient at collecting revenue. And yet Mr. Obama’s proposal to limit deferral only layers on the complexity.

U.S. companies are taxed twice on foreign income — once by the foreign nation at their income tax rate, and then in the U.S. at the corporate income tax rate, 35 percent. Taxing U.S.-based companies twice reduces the incentive to be U.S.-based, because it means paying even more taxes.

The deferral for reporting foreign income and tax credit exist to reduce this incredible disadvantage. Most European nations do not tax foreign-derived income, because it is a mess to enforce and discourages business in their nation.

The deferral and tax credit solution we have is a poor solution for reducing the effect of our insistence on taxing foreign income. So Obama is right in saying it needs reform — but he is implementing precisely the wrong kind of reform. He is trying to weaken it and make U.S. companies pay taxes on foreign income.

What he should do is 1. eliminate taxing foreign-derived income, 2. reduce the corporate rate to be in line with Europe’s corporate tax rate (we have one of the highest in the world), and 3. remove loopholes and some deductions in the tax code which allow companies to pay lower rates.

This would not only make us competitive with the rest of the world, but would also reduce complexity in the tax code, which is an absolute mess. There are so many rules for what can and cannot be deducted, under what conditions, with these exceptions and exceptions to the exceptions that it is monumentally difficult to figure out how much is owed. It should not be that difficult to figure out how much you owe the federal government.

He is coming at it from the wrong end. Rather than reduce complexity, reduce the corporate rate and eliminate loopholes, he wants to layer on more complexity and increase the effective rate.