Obama plans to tax foreign earnings

President Barack Obama will propose raising $238bn to repair the US's crumbling roads and bridges by levying a one-off tax on the cash piles held by US companies overseas.

The measure, a key plank of the president's budget to be outlined on Monday, would impose a 14 per cent "transition" tax on the estimated $2tn in earnings US companies have amassed overseas, the White House said on Sunday.

The proposed tax is less than half the top corporate tax rate in the US, which stands at 35 per cent and which critics claim gives incentives to American companies to hoard earnings abroad instead of investing them at home.

The proposal is likely to attract fierce opposition, and would mean a significant tax rise for companies, particularly in the technology and pharmaceuticals sectors that have been shifting profits to low tax countries such as Ireland and Bermuda.

Critics say the existing offshore cash mountains testify to the aggressive foreign tax planning by US companies, while businesses cite them as evidence of the handicaps they face under an uncompetitive US tax regime.

Mr Obama will also propose a 19 per cent tax on future foreign earnings, giving companies a credit on foreign taxes and allowing them to be reinvested in the US with no additional penalty. Under the current system, US companies pay little or no tax on their earnings abroad until they are brought back into the US.

The money raised would be used to fund about half of an ambitious six-year programme of highway, bridge and transit upgrades, one of the president's main priorities during his final two years in office and an initiative that has attracted some degree of bipartisan support. The remainder of the programme would be financed by the existing highway fund.

"This transition tax would mean that companies have to pay US tax right now on the $2tn they already have overseas, rather than being able to delay paying any US tax indefinitely," said a White House official.

The proposals are the president's latest effort to overhaul a system that Republicans and Democrats agree is not fit for purpose, riddled with inefficiencies and loopholes that disproportionately benefit certain industries.

However, there are sharp differences about how that system should be restructured, and how any funds raised from taxing overseas earnings should be spent.

Those differences have sharpened in recent weeks, after the president outlined a separate set of tax reforms that would target the wealthy, hiking the top rate of tax on capital gains and closing a loophole that allows America's most affluent families to pass down investment income free of tax.

While both parties have raised the idea of tying funding infrastructure upgrades to corporate tax reform, the president's proposals are unlikely to gain traction.

Paul Ryan, the Republican chairman of the influential House Ways and Means Committee, said on Sunday that while his party would try to seek areas of compromise on tax reform, the president was practising "envy economics" by increasing taxes on the rich.

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