Baucus’s Tiny Step Toward Tax Reform

Senate Finance Committee Chairman Max Baucus (L), D-MT, speaks before US Treasury Secretary Jack Lew testimony to Senate Finance Committee on the debt limit in the Hart Senate Office Building on Capitol Hill in Washington, DC on October 10, 2013.
National Journal
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Nov. 19, 2013, 2:27 p.m.

A pro­pos­al to over­haul tax-code rules for U.S. mul­tina­tion­al cor­por­a­tions un­veiled Tues­day by Sen­ate Fin­ance Com­mit­tee Chair­man Max Baucus promp­ted a mix of re­sponses, with little an­ti­cip­a­tion that the changes could be­come law any­time soon.

The pro­posed changes range from set­ting a min­im­um tax on the in­come these com­pan­ies earn world­wide to im­pos­ing a tem­por­ary tax of about 20 per­cent on earn­ings parked abroad.

Tues­day’s pro­pos­al is a re­sponse to the gen­er­al no­tion that cur­rent law cre­ates too many in­cent­ives for mul­tina­tion­al cor­por­a­tions to in­vest and cre­ate jobs over­seas. Roughly $2 bil­lion in U.S. cor­por­ate earn­ings are es­tim­ated to reside over­seas.

“I agree with Sen­at­or Baucus that tax re­form should raise sig­ni­fic­ant rev­en­ue,” said Rep. Sander Lev­in, D-Mich., the top Demo­crat on the House Ways and Means Com­mit­tee. “As Ways and Means Demo­crats have re­peatedly said, the only path to the needed en­act­ment of tax re­form is a bi­par­tis­an one in both the House and Sen­ate.”

But Baucus’s plan — the first of three drafts on vari­ous as­pects of the tax sys­tem that the Montana Demo­crat will re­lease this week — comes after House Re­pub­lic­ans last week in­dic­ated their tax-re­form ef­forts have been put on hold, at least for the rest of the year. And the pro­spect of re­vamp­ing the tax sys­tem next year, with a midterm elec­tion loom­ing, is seen as un­likely.

Rep. Dave Camp, R-Mich., the chair­man of the Ways and Means Com­mit­tee, who is lead­ing House Re­pub­lic­an ef­forts, did not ad­dress the spe­cif­ics of the Baucus pro­pos­al Tues­day, but he said the dis­cus­sion over fix­ing “our broken tax code” is “a crit­ic­al de­bate that must take place if we are go­ing to get our eco­nomy back on track,” adding that “I ap­plaud Chair­man Baucus for his con­tin­ued com­mit­ment to ad­van­cing tax re­form for­ward amongst his Sen­ate col­leagues.”

Baucus’s pro­pos­al fol­lowed a closed-door meet­ing with oth­er sen­at­ors on the Fin­ance Com­mit­tee. The draft de­scribes some of the plan’s ob­ject­ives, which in­clude re­du­cing in­cent­ives for U.S. and for­eign mul­tina­tion­als to in­vest in or shift profits to low-tax for­eign coun­tries; re­du­cing in­cent­ives for U.S.-based busi­nesses to move abroad; and sim­pli­fy­ing the tax rules so that firms with the most-soph­ist­ic­ated tax ad­visers are not ad­vant­aged.

Un­der cur­rent law, U.S. com­pan­ies owe taxes at a full fed­er­al rate of 35 per­cent on all in­come earned world­wide. But they can de­fer U.S. tax­a­tion un­til they re­pat­ri­ate the money. Baucus’s plan to re­struc­ture the sys­tem would lower the cor­por­ate rate by an un­spe­cified amount.

But the draft in­cludes two op­tions for tax­ing in­come from products and ser­vices sold in­to for­eign mar­kets.

One would be a min­im­um tax that im­me­di­ately ap­plies to all such in­come at 80 per­cent of the U.S. cor­por­ate tax rate with full for­eign tax cred­its, coupled with a full ex­emp­tion for for­eign earn­ings upon re­pat­ri­ation. An­oth­er is a min­im­um tax that im­me­di­ately ap­plies to in­come at 60 per­cent of the U.S. cor­por­ate rate if de­rived from act­ive busi­ness op­er­a­tions, but at the full U.S. rate if not, coupled with a full ex­emp­tion for for­eign earn­ings upon re­pat­ri­ation.

Some cor­por­a­tions have been call­ing for a “tax-re­pat­ri­ation hol­i­day” to bring those stock­piled earn­ings parked over­seas back to the coun­try. The pro­posed changes out­lined in the Baucus draft don’t do that. But earn­ings of for­eign sub­si­di­ar­ies from peri­ods be­fore the ef­fect­ive date of the pro­pos­al that have not been sub­ject to U.S. tax would now be sub­ject to the one-time tax at a re­duced rate of about 20 per­cent, pay­able over eight years — which es­tim­ates say could bring a one-time, $200 bil­lion shot in­to the U.S. Treas­ury.

The two oth­er draft pro­pos­als that Baucus is ex­pec­ted to re­lease this week will touch on tax ad­min­is­tra­tion and cap­it­al-cost re­cov­ery.

Treas­ury Sec­ret­ary Jac­ob Lew said at a Wall Street Journ­al con­fer­ence on Tues­day that he had dis­cussed the draft with Baucus, and he praised the chair­man for put­ting for­ward a plan that “shares some sig­ni­fic­ant char­ac­ter­ist­ics with the pres­id­ent’s frame­work” while in­clud­ing pro­vi­sions that he hopes will find sup­port among both Re­pub­lic­ans and Demo­crats.

Lew said that such a plan to “deal with the dis­par­ity between the U.S. and in­ter­na­tion­al tax rates” could provide a “shot in the arm” to the Amer­ic­an eco­nomy, and he sug­ges­ted us­ing that one-time rev­en­ue to make crit­ic­al in­vest­ments in in­fra­struc­ture. “It would build a found­a­tion for a strong growth and job-cre­ation eco­nomy,” he said.

But not every­one was so pos­it­ive about the Baucus pro­pos­als. In a state­ment, Busi­ness Roundtable Pres­id­ent John En­gler praised Baucus for his ef­forts, say­ing, “Baucus’ goal of in­creas­ing the abil­ity of U.S. busi­nesses to com­pete abroad is crit­ic­al.”

But he ad­ded, “Un­for­tu­nately, we do not be­lieve that the staff’s in­ter­na­tion­al dis­cus­sion draft sup­ports that goal be­cause it would make many Amer­ic­an com­pan­ies even less com­pet­it­ive than their non-U.S. coun­ter­parts.”

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