A major reason US unemployment and US underemployment are both so high is the massive income shifting by US multinational corps from the higher income taxed US to lower taxed foreign tax havens.
A key aspect of this income shifting relates to the financing of manufacturing plants and other property assets.
This massive shifting of US full-time, good-paying jobs overseas in the past 20 years is not just due to the lower wages paid in certain foreign countries, nor is it due just to having lower environmental standards in certain foreign countries.
It is also due to the income tax rate differential between the 35% US Federal Statutory Tax Rate and the substantially lower income tax rate in certain foreign countries like Ireland.
One very easy way for US multinational corps to dramatically shift income from the US to lower taxed foreign countries is to arrange the financing in such a matter that the interest expense tax deduction is made in the US, instead of in the lower income taxed foreign country.
There are many legitimate ways to do this. Just to cite one simple common way, the US Parent borrows money and then makes a capital contribution to its wholly-owned Foreign Subsidiary, which has Interest-bearing Debt. The Foreign Sub then uses these funds to retire its debt.
The end result is that the US Parent gets a US Federal income tax deduction for the interest on its outside borrowing at a 35% tax benefit rate, and the Foreign Subsidiary gets its lower income taxed foreign taxable income stepped up by eliminating the interest deduction that it previously had.
This is clearly a tax loophole that needs to be eliminated.
But also there is another problem here. This income shifting of interest is related frequently with the shifting of US jobs overseas, and particularly US manufacturing jobs, which have a high required capital investment, and thus a high need for financing this expensive capital investment.
I think the optimal, easy way to eliminate this tax loophole is to require the US Federal interest tax deduction each year to be based on the lower of the actual interest expense incurred in the US and an allocation of the worldwide interest expense based on relative total consolidated assets located in the US versus in foreign countries.
Let me give an example.
Say a US multinational has Total consolidated assets of $10 bil, with $6 bil of it located in the US and $4 bil of it located in low-taxed foreign countries. Thus, 60% of the company's total consolidated assets are located in the US.
And let's assume the consolidated interest expense is $500 mil, with the US books having $450 mil of this total.
Presently, the US multinational corp gets a 35% US Federal Income Tax Deduction on this $450 mil.
Based on the worldwide total asset allocation to the US of 60%, the amount of the consolidated interest expense tax deduction in the US would be 60% X $500 mil, or $300 mil.
Thus under my proposal, the US Federal Income Tax Deduction for Interest would now be $300 mil, since it is less than the $450 mil.
In addition to closing a major tax loophole on the shifting of income related to financing, this proposal also provides a keen incentive for US multinational corps to keep their manufacturing plants and other operations with heavy capital requirements in the US, to move foreign manufacturing plants and other operations with heavy capital requirements back to the US, and to place a brand new manufacturing plant and other operations with heavy capital requirements in the US, since the more assets that are located in the US, the higher the US interest expense tax deduction would be.
So, this tax loophole proposal will also be a highly stimulative US full-time, good-paying job creation initiative.
All of the tax revenues raised here by the US Government, which will be substantial, should be used to reduce the US Debt. And this proposal is an example of how the US Government can creatively reduce the US Debt substantially, and also create many full-time, good-paying US jobs at the same time. And there are many other US Government actions that can do both.....reduce US Debt and create US jobs.....the US Government just needs to have the creativity to derive them.
