Tax experts will argue about nearly anything. But on one issue, there is something approaching a consensus: Corporate tax rates in the U.S. are too high. Where all that harmony turns dissonant, however, is over the matter of what to do about it. Cutting the corporate rate, it turns out, raises all sorts of complex technical problems, to say nothing of being a political nightmare.    more »

President Obama took aim at multinational corporations last May at a press conference on international tax policy. I’ll leave out the details here, lest I put you to sleep or explode your brain. Let’s just say that the current system is a mess that drastically needs fundamental reform. Economists describe two contrasting “pure” approaches to taxing the income U.S. companies earn abroad. A “worldwide” approach would apply our domestic tax rules to all income (with a foreign tax credit to protect against double-taxation). In theory, that system would tax U.S. business income the same, whether it’s earned at home or overseas, so firms shouldn’t care where they invest. In contrast, under a “territorial” or “dividend exemption” system, the U.S. wouldn’t tax active business income earned overseas; American firms would pay only the taxes of the country where they earn income, just like any non-U.S. business operating there. In theory, that puts U.S. businesses that invest abroad on equal tax footing with foreign firms.    more »

Yesterday my colleague Bob Williams blogged on how difficult it will be to dig ourselves out of our enormous budget hole. He examined CBO’s biennial Budget Options report, which contains a list of “revenue options” for modifying Federal taxes. Bob focused on the year with the smallest deficit over the ten year budget window which happens to be 2012. In that year, CBO predicts we will run a deficit of “only” $633 billion. The individual income tax raises the bulk of federal revenues, so naturally Bob looked at incremental reforms of those levies.    more »

International tax gives me a migraine, but President Obama’s new effort to tax overseas income has the wonkosphere buzzing, so I can’t resist adding to the cacophony. First, some of what Obama is proposing will be very useful. Some may be counterproductive. But whatever it is, it is not tax reform. I wish Obama would stop degrading the concept of reform by using the phrase to describe what is mostly a tax increase on multinational businesses. Tax reform implies a coherent structure for raising revenue. This is a complex package of international tax changes, but I don't see the all-important internal logic that makes it reform.    more »

The other day, President Obama told the Business Roundtable that he’d like to lower the corporate tax rate “in exchange for closing a lot of the loopholes that make the tax system so complex.” And so inefficient, he might have added. It is a great idea, and something that many other developed countries have done in recent years. But Obama has two problems. The first is that he keeps extending targeted business incentives, such as the research credit. Elminating these tax breaks makes good sense. But Obama is not only not eliminating old loopholes, he’s even created a few new ones.    more »

How much will the $300 billion in tax cuts approved today by the House Ways & Means Committee really stimulate the economy? They will help some, but don’t expect them to accomplish a lot. I’d give the overall plan a Gentleman’s C. Some provisions would channel money to low-income people most likely to spend it, but deliver the cash too slowly. Others distribute the funds relatively quickly, but give an awful lot to wealthier taxpayers who are least likely to spend it.    more »

Last week’s travel section of the New York Times lists the top 44 vacation destinations for 2009. Neither Bermuda nor the Cayman Islands were on the list. And it looks like neither will make the top destination list for the headquarters of U.S. multinational corporations. The “hot” tax haven this year is cool Switzerland. In the last few months, three large U.S. businesses that are currently chartered in Bermuda have announced that they are packing up and moving to Switzerland. Meanwhile, former hot spot, The Cayman Islands, seems to have lost its allure. Two U.S. companies incorporated there have announced headquarter moves to Switzerland and one plans to reincorporate in Ireland in 2009.    more »

U.S. multinational corporations want another tax holiday. (Who doesn’t?). Under current law, U.S. multinational corporations can defer U.S. income tax on profits earned abroad in their foreign-owned subsidiaries until they bring them home as dividends from the foreign corporation to the U.S. parent. The American Jobs Creation Act of 2004 provided them with a “one-time” chance to bring home these profits at a greatly reduced tax rate. Instead of paying the normal rate of 35 percent (with a credit to offset taxes paid abroad), Congress allowed firms that filed a “domestic reinvestment plan” to bring back funds at an effective rate of just 5.25 percent. To get the benefit of the lower rate, U.S. companies could not use repatriated profits from their foreign subsidiaries to distribute cash to their shareholders either as stock redemptions or dividends, so that the money would be available for domestic investment. The argument back then was that the holiday would stimulate jobs and investment in the United States by allowing firms to access profits trapped abroad by the U.S. tax on repatriations. However, this ignored the well-known adage that “money is fungible”—i.e., that if we require companies to reinvest repatriated profits, it will free up other cash that they can redirect as they wish.   more »

Good to see comments on the New Jobs Tax Credit from two authors of papers on the subject, Timothy J. Bartik of the Upjohn Institute and John H. Bishop of Cornell. In response to my criticism of Barack Obama’s call for an employer credit to encourage hiring, both argue that the Carter-era version of this idea—the 1977-78 New Jobs Tax Credit—succeeded in creating as many as 700,000 new jobs in the first year.    more »

Did bad tax policy help cause the economic meltdown? Former assistant Treasury Secretary for Tax Policy Pam Olson thinks so. Speaking at a Dec. 5 tax reform conference sponsored by TPC and Tax Analysts, Pam fingered what she called an “anti-equity and pro-leverage” Internal Revenue Code as one culprit in the collapsing credit markets. TPC’s Bill Gale agrees--after a fashion--although other tax experts are unconvinced.    more »

Just as demand for both alternative energy and low-income housing is growing, is the market drying up for the tax credits that drive much of the investment in both? Evidence is that the answer is “yes.” The culprits: the crumbling economy, paralyzed bond markets, and the government itself. This may be yet another example of the always-deadly law of unintended consequences.    more »

John Endean raised an intriguing idea the other day in response to my blog on whether business executives would be willing to give up targeted tax breaks in return for a lower corporate rate, as John McCain has suggested.    more »

The Wall Street Journal editorial page ran one of its favorite tables the other day, purporting to show how uncompetitive the U.S. corporate tax regime is with the rest of the developed world. The chart shows that, at nearly 40%, combined state and federal statutory rates here are far higher than the average of the countries in the OECD.    more »

Johnny, we hardly new ye.

John McCain’s ambitious plan to reform corporate taxes is disappearing faster than the Washington National's chances to win the national league pennant. What once had the makings of a provocative and potentially beneficial idea is morphing into a gimmicky mess.

Earlier his spring, McCain was talking about allowing companies to expense all their capital investments in the year they are made. This would eliminate many of the timing-related issues that make corporate taxes so complicated. It might even have become the first step towards replacing the income tax with a cash-flow levy. In such a system—a version of a Value Added Tax—companies would subtract their costs of goods from revenues and pay tax on the difference.

Back then, McCain had not yet answered one big question: What would happen to the tax deduction companies take for their interest payments? In any sensible expensing scheme, interest could no longer be tax deductible. If it were, businesses would become huge tax shelters.

Now that he’s started to answer this and other questions, his idea is getting worse. In his revised plan, which staffers have described to TPC, expensing would be limited only to short-lived property—equipment like cars and computers--now depreciated over five years or less. The proposal would be temporary, and would expire after five years. Interest payments would be taxable, but only if used to finance specific short-lived investments.

Yuck. Speeding up a deduction that you could take in a couple of years anyway is not much of a tax break. Making the proposal temporary just creates messy new timing issues—and would threaten to become yet another tax “extender” that is part of the annual Washington theater. And tying the interest deduction to the purchase of specific property will surely create endless opportunities to game the system. This will bring joy to the hearts of investment bankers and tax lawyers, but not to the rest of us.

The best that can be said about McCain's latest version is that perhaps it is an effort to shove the tip of the camel’s nose under the proverbial tent: Start with this and get more ambitious later. But that's a reach. Don’t get me wrong, McCain’s initial proposal had its problems, but it was intriguing, potentially far-reaching, and worthy of debate in a presidential campaign. This version will fall into the dust-heap of forgotten ideas. There was a brief moment when I thought we were going to have a serious tax reform debate in this campaign. I should have known better.

Kudos to Rep. Paul Ryan (R-WI), the senior Republican on the House Budget Committee, for proposing an ambitious plan aimed at bringing government spending under control over the next 75 years. Actually, Ryan would do even more than that. He’d also restructure the tax code, Social Security, Medicare, and Medicaid.    more »