Tax

Chartbook: The Tax Extenders

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An annotated version of this chartbook is available at Want to Understand the Tax Extenders? Here's a Few Charts.

Much more detail about the history, rationale, and cost of the extenders is available at our resource: Tax Break-Down: Tax Extenders

 

Report: Analysis of the Tax Reform Act of 2014

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More resources and blog posts about the Tax Reform Act of 2014 are available on our tax reform resource page.

Op-Ed: Tax Reform: A Real Possibility and Necessary

Pioneer Press | July 8, 2013

July may be the most important month for tax reform since 1986 -- the last time the tax code was considerably altered.

A week ago, Senate Finance Committee Chairman Max Baucus (D-Montana) and ranking member Sen. Orrin Hatch (R-Utah) sent individualized Dear Colleague letters to all 98 senators requesting input on comprehensive tax reform legislation. The senators advocated for scrapping the entire tax code and rebuilding it one page at a time, defending inclusions on an individual basis.

This letter came a week after the Senate Finance Committee held a series of private meetings on tax reform, including a joint-chamber meeting led by U.S. Rep. and Ways and Means Committee Chairman Dave Camp (R-Michigan) to kick off their summer dialogue tour. The two chairmen will soon begin to traverse the country -- starting in St. Paul on July 8 -- to engage voters directly on tax reform.

"We're going to talk to people, families, consumers, business groups ... to get a better idea of what people are thinking," Baucus said at a June 17 breakfast sponsored by The Christian Science Monitor.

All told, the actions of these leaders signify that a comprehensive rewrite of the tax code is a real possibility and the top priority of some of our nation's most powerful legislators (Sen. Baucus and Rep. Camp will leave their leadership posts in 2015). Obviously, real challenges exist -- namely clear partisan differences and overwhelming hesitation among politicians to discuss eliminating or restricting popular tax breaks -- but the efforts by Rep. Camp and Sens. Baucus and Hatch are a clear step forward and may be the last chance for reforming our inefficient and outdated tax code.

As members of the aforementioned Simpson-Bowles led Campaign to Fix the Debt, we commend Chairman Baucus and Ranking Member Hatch for taking such a bold approach in putting forth the "Zero Plan" and providing valuable leadership in forcing a real discussion on tradeoffs that will advance the cause of serious tax reform and possibly broader fiscal reform. We believe that our nation's unsustainable debt is a very real problem and see tax reform -- along with replacing sequestration with larger, more gradual and sensible spending reductions -- as a necessary first step to tackling the debt.

We are equally excited that Americans can hear details first hand from Rep. Camp and Sen. Baucus.

Eliminating all tax preferences in the past allowed us to reduce the top two rates to 23 percent while setting aside a small portion of the savings for deficit reduction. Starting with a clean slate, and requiring those who wish to add back tax preferences to pay for them with rate increases, would lead politicians to subject tax expenditures to much greater scrutiny and, if desired, then to restore worthwhile tax expenditures in a more efficient and cost-effective manner.

The decision by Sens. Baucus and Hatch to use this approach makes us hopeful that Washington can enact tax reform to attain lower rates, level the playing field, improve simplicity, promote robust economic growth, and reduce the deficit.

We see this as an notable case of bipartisanship and hope that other leaders in the House and Senate will rise to the challenge and act responsibly in using the savings from eliminating the $1.3 trillion in annual "tax expenditures" to lower rates in a progressive manner, reduce the deficit, and restore those tax provisions they consider worthwhile in a more efficient, cost-effective manner.

Now is the time for D.C. to get their act together and make this type of action the new norm. Our nation's future and the lives of our children depend on it.

Former Congressman Tim Penny represented Minnesota's 1st Congressional District from 1983-1995. Former Congressman Mark Kennedy, currently the director of the George Washington University School of Political Management, represented Minnesota's 2nd Congressional District from 2001-2003 and Minnesota's 6th Congressional District from 2003-2007. Both are working with the Campaign to Fix the Debt, a bipartisan group urging enactment of a thoughtful and comprehensive plan that puts U.S. debt on a downward trajectory over the long term while protecting the most vulnerable and meeting the federal government's vital commitments.

Op-Ed: Which Corporate Taxation for America?

Project Syndicate | December 2, 2013

Corporate tax reform is one of the few issues that garner bipartisan support in a deeply divided US Congress. The current system, all agree, is deeply flawed: the corporate tax rate is too high by global standards, and the corporate tax base is too narrow, owing to numerous credits, deductions, and special provisions that distort economic decisions.

But there is significant debate about how to fix the system. One major area of disagreement is how to tax the foreign earnings of US multinational companies (MNCs), a disagreement highlighted by the recent proposals issued by Senator Max Baucus, the chair of the Senate Finance Committee.

The current US system is based on a worldwide principle: the foreign earnings of US companies are subject to US corporate tax, with the amount owed offset by a tax credit for taxes paid in foreign jurisdictions. Most other developed countries, by contrast, have adopted “territorial” systems that largely exempt their MNCs’ foreign earnings from home-country taxation.

MNCs headquartered in countries that employ a worldwide tax system are at a disadvantage when they compete in third-country markets with MNCs headquartered in territorial systems. Whereas US MNCs must pay the high US corporate tax rate on profits earned by their affiliates in low-tax foreign locations, MNCs headquartered in territorial systems pay only the local tax rate on such profits.

For example, when a US firm and a firm headquartered in a territorial system compete in a country where the local tax rate is 17%, the foreign firm owes 17% of its profits in taxes to the local country, while the US firm owes 35% of its profits in taxes – 17% to the local country plus 18% to the US. That difference translates into a sizeable cost advantage that allows the foreign firm to charge lower prices and capture market share from its US counterpart.

Current US law attempts to offset this competitive disadvantage through deferral: US MNCs are allowed to defer – potentially indefinitely – payment of US corporate tax on their foreign earnings until the earnings are repatriated to their US parent firms. Not surprisingly, most US MNCs take advantage of the deferral option for at least some of their foreign earnings.

As a means of bringing back this estimated $1.7 trillion in foreign earnings, the Senate Finance Committee’s draft proposals suggest the elimination of deferral. However, faced with the threat to their competitiveness that this would pose, many US MNCs would shift their headquarters to countries with lower corporate tax rates and territorial systems.

The global competitiveness of US MNCs and where they are based matter to the health of the US economy. Despite the rapid growth of foreign markets, US MNCs still locate significant shares of their real economic activities – about 65% of their sales, 68% of their employment, 70% of their capital investment, and 84% of their R&D – at home. Much of their domestic activity – particularly R&D, which has significant local spillover benefits – is related to their headquarter functions. And foreign direct investment by US MNCs is not zero-sum: it encourages rather than reduces employment, investment, and R&D in the US.

Deferral is essential to maintaining US MNCs’ competitiveness as long as the US relies on a worldwide corporate-taxation system. But deferral is not without significant costs for US MNCs and the US economy alike. Deferred earnings held abroad are “locked out” of the US economy, in the sense that they are not directly available for domestic use by US MNCs and their shareholders.

Moreover, deferral distorts corporate balance sheets and capital-allocation decisions. For example, firms may use earnings held abroad as collateral to take on more debt and incur higher borrowing costs at home. Or they may use these earnings to make investments abroad that yield a lower return than investments at home. Overall, such efficiency costs are estimated to be 1-5% of deferred earnings, rising as deferrals accumulate.

As the Senate Finance Committee’s draft proposals suggest, the US should jettison its worldwide approach to corporate taxation and adopt a territorial system for taxing US MNCs’ foreign earnings. Such a system would provide a level playing field that supports US MNCs’ global competitiveness. It would also eliminate the efficiency costs of deferral and boost US MNCs’ repatriation of foreign earnings, with significant benefits for output and employment.

Based on recent research that incorporates conservative assumptions, we estimate that under a territorial system US MNCs would repatriate an additional $100 billion a year from future foreign earnings, adding about 150,000 US jobs a year on a sustained basis. We also estimate that under a transition plan for taxing the existing stock of foreign earnings held abroad, similar to one proposed by US Representative Dave Camp, US MNCs would repatriate about $1 trillion of these earnings, adding more than $200 billion to US GDP and about 1.5 million US jobs over the next few years. These are significant gains for an economy that is still operating far below potential, remaining about 1.5 million jobs short of its pre-recession employment level.

A territorial tax system does have one potential disadvantage: it could strengthen US MNCs’ existing incentives to shift their profits to lower-tax jurisdictions. Competitive cuts in corporate tax rates, the spread of tax havens, and the rising importance of easily movable intangible capital have already made these incentives more powerful. Recent studies find growing segregation between where MNCs locate their real economic activities and where their profits are reported for tax purposes.

Income shifting and the resulting erosion of domestic tax bases pose serious challenges, and countries with territorial systems have adopted tough countermeasures to combat them. If the US moves to a territorial system, it should follow suit. A modern territorial system with adequate safeguards against income-shifting and base erosion is the right approach to taxing the foreign earnings of US MNCs.

Op-Ed: "Blank Slate" Key to Tax Reform

POLITICO | July 22, 2013

In the quarter century since Congress last reformed the Tax Code, back in 1986, it seems Washington has worked overtime to create the most inefficient and ineffective globally anti-competitive tax system humankind could dream up.

It’s time to start over — time to start with a blank slate.

The 1986 reforms accomplished a great deal to simplify the Tax Code and promote economic growth by eliminating tax preferences and using the resulting funds to lower the top rate to 28 percent. Unfortunately, those deductions, exclusions and other preferences have returned over the years in the form of approximately $1.3 trillion worth of annual backdoor spending that now litters the Tax Code.

This hidden spending complicates tax filing, distorts economic decision making and slows economic growth. It also means that despite a top individual rate of 39.6 percent, deficits are still far too high. The current Tax Code is badly broken.

The conventional wisdom holds that real reform — reform that reduces or eliminates tax preferences to cut tax rates, simplify the Tax Code, promote economic growth and help to control the national debt — is impossible as long as powerful interests continue to promote the status quo.

But conventional wisdom was turned on its head recently when the two leaders of the Senate tax-writing committee called for starting tax reform with a “blank slate.”

The bold proposal from Chairman Max Baucus and ranking member Orrin Hatch begins by eliminating each and every tax preference. Starting from scratch, as Sens. Baucus and Hatch propose, provides the single best chance to accomplish fundamental tax reform, which could be one of the best ways to get the economy moving.

On the Fiscal Commission (known colloquially as Simpson-Bowles), our decision to take a similar approach — we called it the “zero plan” — was a turning point that truly broke the partisan logjam. At the time, we found eliminating all tax preferences would allow the top individual rate to be reduced to 23 percent and the top corporate rate to 26 percent, while still dedicating some of the revenue to reducing the deficit.

This was a true game changer that made it possible for us to put forward tax reform that accomplished the Republican goal of substantially reducing rates and the Democratic goal of raising new revenue.

Importantly, starting from scratch doesn’t mean that all tax preferences will be eliminated. Instead, it puts the onus on advocates of tax preferences to justify their existence and it requires policymakers to pay for those add-backs with higher rates. We believe most will not pass the cost-benefit analysis and will either be eliminated or phased out. Those deemed to serve important public policy purposes can be added back more efficiently and cost-effectively — for example, by using credits instead of deductions.

On the Fiscal Commission, we put forward an illustrative tax plan that added back a number of tax expenditures in a scaled-back, better targeted form, and achieved a top rate of 28 percent. Former Congressional Budget Office and OMB Director Alice Rivlin and former Sen. Pete Domenici have their own tax plan that includes similar rate reduction. Both plans would increase the progressivity of the Tax Code and, importantly, both would help raise new revenue to help pay down the deficit.

With $1.3 trillion of annual tax preferences, there are plenty of funds available to lower rates, restore worthwhile tax preferences and contribute to deficit reduction. And if we design the reform right, it also can do wonders for economic growth.

Of course, tax reform can’t do all the work on its own. Any successful effort to truly unlock the U.S. economy’s potential must bring our rapidly expanding national debt under control, which means slowing the growth of our unsustainable entitlement programs to match revenues from tax reform, along with other cuts in spending.

Combining tax reform with a broader package, one that also replaces the mindless sequester cuts with larger and smarter spending cuts and entitlement reforms, would represent a tremendous accomplishment.

Agreeing on such a package will not be easy. But the efforts and leadership of Sens. Baucus and Hatch, along with the hard work Ways and Means Committee Chairman Dave Camp has done in the House laying the foundation for reform, make it seem more possible than it has in some time.

Starting with a blank slate doesn’t allow us to avoid the hard choices. But it does make them just a little bit easier. It lets us build the Tax Code we want, rather than chip away from the Tax Code we have. If members of Congress and the administration rise to the challenge, this country’s future will be a whole lot brighter.

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