Twenty two years ago I sat in my corporate tax law class led by Professor George Yin, who would go on to provide economic counsel in the George H.W. Bush administration. Professor Yin had some interesting theories two decades ago that are today making headlines in The Wall Street Journal.

In case you were wondering why I chose to attend a corporate tax course as opposed to something exciting like mock trial, you should know that I always knew that I would be a tax attorney as opposed to a trial attorney. It’s true that most law students enroll in the “exciting” courses like moot court, evidence, procedure and others that will one day lead them to careers as the next Clarence Darrow. It was common for those classes to have sixty or more students.

In contrast, my corporate tax class had six of us. So you had to be on your toes every day.

If you’ve ever watched the old PBS series “The Paper Chase” with John Houseman – you get the idea what it’s like to be a student learning under the Socratic method. Under this method of teaching the professor calls upon students who were expected to read and understand the material prior to class so that he or she could make valid legal arguments in front of other students.

When you were one in a class of sixty there were days – or even weeks – where you avoided becoming the mouse being played with by the professorial cat. 

Being one of a class of six, on the other hand didn’t allow for any off days. Professor Yin would often “assign” us to play various roles. “Mr. Hersch, today you are going to argue for the taxpayer in the case GWR Corporation  v. IRS Commissioner, while Ms. Smith you are going to argue for the IRS. Ms. Sokol, I want you to play the role of the presiding Tax Court Judge…” is how a typical class day would begin.

So I paid attention in Professor Yin’s class. What he said more than two decades ago – that corporate tax rates should be eliminated or at least severely curtailed, is being promoted by various groups, from The Wall Street Journal’s editorial board to other think tanks and pundits.

Why are these thoughts becoming popular amongst so many? The current average combined federal, state and local government tax rate on corporate earnings stands at 39.25%, higher than every other developed nation except Japan (39.54%).  United States based companies also pay the difference between what they pay to foreign governments and the US tax rate. 

As an example, a United States firm transacting business in Ireland (12.5% corporate tax rate) pays Uncle Sam 35%, but gets a credit for paying Ireland its 12.5%. In contrast, a German company doing business in Ireland pays Ireland the same 12.5% but pays no German income tax. By itself, this disparity creates a significant disadvantage for United States based firms attempting to compete internationally.

Congress long ago created a corporate tax deferral to compensate for this competitive disadvantage. Under deferral, a company doesn’t have to pay the US corporate rate until it repatriates the earnings. It can retain them overseas or reinvest them abroad with no penalty. But if it brings them home or pays them as dividends, the tax bill comes due.

The German company faces no such quandary. It pays the Irish tax, and it’s free to invest that money in Ireland, Germany or anywhere else. This eliminates the incentive to keep the money abroad. 

So when you have a complicated tax system that discourages companies from repatriating profits earned from overseas – either in the form of investment in US based capital, employees or paying those profits out in the form of dividends, and you combine that with one of the highest corporate tax structures in the world, it’s no wonder that US firms continue to ship jobs and manufacturing overseas.

The growth of American enterprise is fueled by small to medium sized companies. They can often outsource overseas and fall under the radar screen and avoid becoming a political target

Rather than closing loopholes on foreign based income as the Congress is talking about doing today, it should instead lower the American corporate tax rate along with allowing the repatriation of profits without taxation. 

What Professor Yin taught us in our small classroom back in 1987 is truer today than it was then. Let’s hope our friends in Washington heed this advice.

©2009 Craig R. Hersch .Learn more at www.sbshlaw.com