Hopefully DU will have enough interest to follow this series exposing the failed Corporate Tax Structure and gain a thorough understanding of the underlying structural problems in our Corporate Tax Code. The following is merely the "Tip of the Iceberg" and typically these are subtle changes in the Corporate Tax Code that have HUGE consequences for working Americans are submitted as single line items of much larger legislation as to escape from view of the General public

Part 1 Corporate Tax Bias against US Manufacturing and Production

Under the current foreign tax credit system, excess credits on foreign corporate earnings can be used to shield Technology income from US Corporate taxation through a process know as “Cross Crediting”. Royalties and management fees are often subject to little or no tax in the foreign country in which the license or service is used. Under the network of US Tax Treaties, withholding rates are usually set at 0% or 5%. However, under current law, because Royalty and Fee income streams are grouped in the “General Limitation” basket, they can absorb excess Foreign Tax Credits generated by other High-Taxed general limitation income. The result is that the United States collects almost no tax on foreign royalties and fees.

To illustrate – the Royalties and License Fees paid by a Japanese subsidiary to a US parent corporation would be fully deductable from the Japanese firm’s corporate income tax, (taxes at a 40.7% tax rate in 2005) and would not be taxed by Japan when paid to the US Parent firm.

Because of these interactive tax features, royalties and fees earned abroad are often taxed at a lower rate then comparable technology income earned in the United States. This creates a perverse incentive to exploit “Intellectual Property” overseas rather then in the United States. Because of Consolidating the number of foreign tax credit baskets from 9 to 2 in the beginning of 2007 under the “American Job Creation Act. This increases the opportunities for cross crediting, giving further incentive to exploit technology abroad rather then United States production.

The rising commercial importance of “Intangable Assets” along with Royalty and Fee income, makes the Tax Policy towards them an important issue. During the 10 year period between 1996 and 2005, US MNC’s (United States MultiNational Corporations) increased their receipts from exports of goods and services by 50%, but increased their receipts from exports of “Technology Royalties and License Fees” by 75%

The use of US Technology abroad is generally good for both US firms and the World Economy, but we see no sense in a tax bias that encourages High Technology production abroad at the expense of High Technology production in the United States.