Like Vladimir and Estragon waiting for Godot, Washington has been waiting for Congress to tackle tax reform. The reason for the lack of action is a fundamental disagreement between Democrats and Republicans over what reform should achieve. Republicans believe that tax reform should be used to stimulate business and grow the economy. Democrats see reform as a way of bringing fairness to classes—taxing the 1% to raise revenue for spending on infrastructure, education, healthcare and other programs. To date, this chasm has been unbridgeable.
Broad, comprehensive reform is still unlikely. Many believe that it would take a political alignment in the Executive and Legislative branches, that is, a President and Congress of the same party to reform tax rates for individual payors and a redrafting of the tax code to eliminate or reform many deductions and benefits that cost the Treasury billions of dollars.
There is one area that some believe may be ripe for reform, and that is our foreign tax system. Today, the US is the last industrialized country to tax corporate profits on a global basis. That means that a corporation that earns money in the EU must pay the corporate tax rate of 35%--among the highest corporate tax rates in the world-- when it brings that money to its corporate coffers in the US. But that tax is only paid if in fact the foreign earnings are brought home, which is the reason that many corporations don’t bring that money home. Today, there is more than $2 trillion of US-based corporate money offshore.
The combination of our world-wide tax system and the high corporate tax rate is what is behind the spate of corporate inversions which are derided by many politicians in Washington today. Corporate executives claim that are only trying to drive value for their shareholders by engaging in these perfectly legal transactions. Why pay more in taxes than one has to? As Judge Learned Hand said in 1934—
[A]nyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.
Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
Nevertheless, corporations that invert have been called unpatriotic, treasonous and worse. But the fact is, name calling has not stopped inversions from happening simply because they make good business sense. The US tax code is an outlier when it comes to promoting a robust environment for business.
Perhaps buoyed by the relative ease with which Congress passed over 50 expiring and expired tax provisions in the year-end Omnibus appropriations bill, there is hope that Congress can use that momentum to address the foreign tax area. The goal would be to make the US corporate tax system more like the rest of the world and put the US on an even footing. It could do this by moving to a territorial tax system, taxing only income earned in the US, reducing the corporate rate to 25% (or lower) and facilitate the on-shoring of the $2 trillion that is held overseas. The latter could be achieved by some type of one-time tax holiday.
Tax reform is high on the agenda of Speaker Paul Ryan (R-WI) who relinquished his chairmanship of the House Ways & Means Committee to assume the top position in the House. While chairman, he made it clear that fundamental tax reform was a priority. That desire did not abate when he became Speaker. His replacement, Rep. Kevin Brady (R-TX) has picked up the mantle and has said that his Ways & Means Committee will pass an international tax reform bill this year.
On the Senate side of the Capitol, Senate Finance Committee Chairman Orin Hatch (R-UT) is equally committed to finding a solution to the inversion issue. Among others he is joined by incoming Senate Democratic Leader Chuck Schumer (D-NY), one of the leading pro-business Democrats in the Senate.
Action on foreign taxation is no sure thing; in fact, it is probably less than likely to occur. But unlike the Godot for whom Vladimir and Estragon endlessly waited, foreign tax reform will come.
