Sen. Baucus Introduces International Tax Reform: Upsides and Downsides

November 20th, 2013 at 12:29 pm

Despite the gridlock that would seem to preclude a serious stab at tax reform, Sen. Max Baucus made precisely that parry yesterday with a proposal to change the way the US taxes multinational corporations (MNCs).

It’s just a rough draft, but it looks to me to have upsides and downsides.


–Revenue neutrality: Unless you’re casting in with the supply-side, trickle downers, it is widely recognized that the nation will need more revenue going forward.  Rate reductions from the Bush years have been mostly locked in, as President Obama has made over 80% of those cuts permanent.  As CTJ’s Bob McIntyre points out, by declaring that corporate reform should be revenue neutral, Sen. Baucus is implicitly saying that we’ll have to find new revenue elsewhere, presumably in the individual side of the tax code.

With corporate profitability at an all-time high, and corporate revenues to the Treasury historically low, why go there?  And even if you wanted to end there, why start there?

– –Reduces the tax incentive to offshore production but doesn’t eliminate it

Under the plan, earnings from sales by MNCs back into the American market are taxed right away, taking a whack at the serious problem of shifting operations offshore to avoid US tax even when they’re making profits from US customers.

But, as my CBPP colleague Chuck Marr points out, under the Baucus plan “the draft still allows some foreign profits to be taxed at a discounted tax rate compared to domestic profits.  Some foreign profits would be taxed at either 60 percent or 80 percent of the U.S. corporate tax rate — a proposition that surely would prove difficult for any average U.S. taxpayer to understand.”

Regarding foreign earnings, the draft offers two alternatives.  Under one plan, as long as US subsidiaries pay taxes on their foreign earnings that are worth at least 80% of the US domestic tax rate, the rest is exempt.  Say tax reform managed to cut enough corporate tax breaks to afford lowering the US tax rate to 30%.  Then if a subsidiary paid taxes worth at least 24 percent of its foreign profits, it would owe no additional US tax.   But if it paid only, say, 10 percent of its foreign profits in tax, it would have to pay an additional 14 percent immediately to the US. The second option applies a lower minimum of 60% to so-called “active foreign market income,” and taxes other income at the full US corporate rate.

Both these plans mean that all MNC’s foreign profits would be taxed by the US immediately or not at all, so this would eliminate the current system’s “deferral” feature where companies can delay paying US tax by stashing profits offshore.


–Eliminating deferral would be a welcome change, though the fact that foreign earnings above the minimums still goes untaxed keeps the tilt toward offshoring production and sales.

–A potential upside is finally making companies pay some tax on the large stash of foreign earnings that companies are keeping offshore to avoid US tax.  Sen. Baucus proposes to tax these profits at 20%, a big discount over the 35% statutory rate, but well above other numbers that have been floating around, like Rep. Camp’s suggestion of 5%.

The draft suggests phasing this part of the tax in over eight years, and over that period it would raise $200 billion.  In another smart move, the plan correctly notes that since these are one-time revenues, needed to transition to the new system, they should not be considered part of the broader base that could permanently support lower rates.  They’re one-time savings that drip in over a bunch of years.

So, here’s the kicker: I’m sure the senator and everyone else who’s been clamoring for tax reform would like to see these ideas—or some variant therein—get some legs.  One way to do so would be to tie those new, one-time revenues for infrastructure investment.  Use them to support a number of discrete projects, for FAST! (Fix America’s Schools Today), for urban renewal in our hardest hit cities, or to capitalize a public/private infrastructure bank.

Add that to your bill, Sen. Baucus and the Finance Committee, and I promise you’ll get a lot more people interested in it!

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