Daily Deduction

from the Tax Policy Center

How Do You Solve a Problem Like Inversions?

By :: July 29th, 2014

How do you catch a tax and pin it down? Can governments make corporations “stay and listen to all they say?” Treasury Secretary Jack Lew in his Washington Post op-ed called on Congress to immediately stop corporations from lowering taxes by incorporating overseas. Former Treasury official Steve Shay suggests the Administration doesn’t need to wait for Congress. He says Treasury already has the legal authority to curb key tax incentives for US companies already reincorporated overseas, including interest deductions for firms that load debt on their US business units. Australia is pursuing a comparable strategy.

But if you really want to say “so long” and “farewell” to inversions… TPC’s Eric Toder breaks it down in his Wall Street Journal MarketWatch essay. He suggests two alternatives he and his American Enterprise Institute co-author Alan Viard proposed several months ago. The US could work with other advanced economies to share taxable profits of multinationals by formula. Or, the US could ditch the corporate tax, and instead tax shareholders directly on business profits. Income would be taxed as earned by publicly-traded corporations, rather than as gains when a shareholder sells stock. But, for now, Washington is arguing over corporate tax Band-Aids, when major surgery is needed.

Paying for child care: Help is best served immediately… or at least monthly. TPC’s Elaine Maag dives into the details of the “Helping Working Families Afford Child Care Act” put forward by Democratic Senators Jeanne Shaheen, Barbara Boxer, Patty Murray, and Kristin Gillibrand. Families would get a more generous and refundable tax credit for child care expenses than under the current Child and Dependent Care Tax Credit. While Elaine likes the proposal, she suggests Congress may be better off boosting funding for direct childcare subsidies instead. “Government has experience delivering monthly benefits and it better fits the cash flow needs of many families” who usually pay child care bills monthly and can’t wait for a tax refund.

On the Hill today: The Senate Finance Committee holds a hearing on tobacco taxation; the Joint Committee on Taxation offers background. The Senate Budget Committee will examine the economic and budgetary consequences of climate change. The House Ways & Means panel’s Subcommittee on Social Security will hold a hearing on the financial status of Social Security, including what influences benefits paid, and Americans’ retirement readiness. The hearing follows yesterday’s report by the Social Security trustees.

Take stock of the Affordable Care Act. The Supreme Court will likely have to decide the fate of ACA tax credits for residents of states that rely on federal exchanges. In the meantime, tune in at noon to a special Urban Institute Health Policy Center event. Panelists will explore new findings from the Health Reform Monitoring Survey, evaluate the ACA to date, and consider implications for next year’s open enrollment period.

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  1. Michael Bindner  ::  3:21 pm on July 29th, 2014:

    Steve Shay’s approach will make for an interesting case in Tax Court. As far as Congress acting I don’t see it. There are no campaign funds for fixing this problem right now. The long term fix is to make headquarters locations trivial by enacting consumption taxes, which tax profits along with wages and ideally have no special rates. Taxing income, as Toder and Viard propose is essentially a Net Busienss Receipts Tax – which sounds good to me.

    I commented on the Maag post yesterday which considers the alternative of give a tax credit to stay at home parents and the reality that it is not just the cost of child care that has them go back to work, but whether income bumps from working are worth more than the cost of care.

    Tobacco taxes are more feasible than a ban, which would increase smuggling (as high taxes do). Climate change proposals run into consumption tax proposals. You can’t do both simultaneously and if you really want a carbon tax to work, you can’t depend on the revenue because in a perfect world, there won’t be any. I was making comments about the Social Security Report just today – on how the best reform is to equalize the employer contribution rather than tying it to income, funding int with a consumption tax (so profit is taxes as well and there is no cap) and doing a VAT if there are not personal accounts and a Net Business Receipts Tax if there is a carve out holding, not Wall Street Index Funds (with their attendent commissions and lack of accoutability) but instead employer voting stock (no commissions and the workers control the means of production eventually).

    I suspect that the full DC Circuit panel will make Supreme Court review unnecessary. Sadly, until the GOP gives up on obstructionism, the normal legislative correcting process to clear that up, fix the employer mandate by excluding people already insured other places or provide a subsidy to one spouse when they are not covered by the other spouse’s insurance and their joint income keeps them out of the subsidy zone, while the uninsured spouse could get the subsidy if single.