In last night’s State of the Union address, President Obama proposed a minimum tax for foreign profits of U.S. corporations:

First, if you’re a business that wants to outsource jobs, you shouldn’t get a tax deduction for doing it…. No American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax.

Although the president did not give many specifics of his proposal, it appears to be similar to one I made in September in the New York Times.

Here is how such a proposal would work. Let’s say that Obama’s proposed minimum rate was 18%. If a US company paid more than that rate in a foreign country like Germany or Japan, then it would have no tax liability in the US.

But suppose the U.S. corporation paid taxes on its foreign income at only 2% in the Cayman islands. That income would be subject to the U.S. tax rate of 18% minus the 2% that it paid in the Cayman Islands—or 16%.

This proposal would be much better than the current system where U.S. corporations pay taxes at the 35% rate if they bring foreign income back to the U.S., but only at a lower local rate long as they keep this income abroad. The current system strongly encourages U.S. corporations to use their growing foreign income to build plants and create jobs overseas, rather than in the U.S.

Some liberals would object to the 18% rate on foreign profits because it is much lower than the 35% rate on domestic profits of US corporations. However, that is a theoretical argument. In fact, the effective U.S. tax rate on foreign corporate profits is now zero, so the proposal would actually decrease the differential between the tax rates on domestic and foreign corporate income.

Some conservatives would object to the 18% rate because they believe that corporate income should be taxed only in the country where it is earned. This makes sense for income earned in legitimate taxing countries like Germany and Japan, but not income allocated by U.S. companies to tax havens like the Cayman Islands where the tax rate is zero.

Finally, a coalition of high tech companies is pushing for another tax holiday for bringing back foreign profits to the U.S.—like the one we had in 2004. A tax holiday would mean a 5% tax on repatriated income by US corporations for a short-period—six months to one year.

Another tax holiday would raise a little revenue, but it would reinforce the current system – which is truly dysfunctional. At the end of the tax holiday, U.S. corporations would be again encouraged to keep their foreign profits outside the U.S and wait for the next tax holiday to come about.

What we need is a permanent fix to this system, not a temporary Band-Aid. President Obama’s compromise proposal could be an effective, permanent fix.