As U.S. firms flee to Europe, can Washington get its act together on tax reform?


Rep. Paul Ryan says the spate of U.S. companies fleeing overseas will not spur Republicans to separate corporate tax reform from a more contentious overhaul of the individual tax code. (Michael Bonfigli/The Christian Science Monitor)

You might think the rush of companies renouncing their U.S. citizenship would at long last give Washington policymakers an incentive to compromise on tax reform. After all, everyone from President Obama on down to the greenest House Republican agrees that the corporate tax system, with its highest-in-the-developed-world 35 percent tax rate, is in desperate need of repair.

So far, however, the signs are not good.

In an op-ed last month, Treasury Secretary Jack Lew noted that "even the most optimistic know that the administration and Congress need more time to complete bipartisan comprehensive business tax reform" -- though he claimed (with a sardonic laugh, one imagines) that the moribund process is moving "steadily forward." In the meantime, the White House and congressional Democrats are pushing to enact narrower policies to block corporate expatriations, a practice known as "inversion."

Things were even worse at a recent Senate hearing on the issue.  "It was pretty sad," recalled Mindy Herzfeld, a contributing editor to the trade journal Tax Notes International. "Everyone agreed you need comprehensive tax reform. And everyone also agreed you couldn't get it done. They just gave up before they started."

What gives? The most immediate problem is the Nov. 4 congressional election. Instead of focusing on tax reform, Democrats are focusing on the great campaign ads they might be able to run against Republicans who vote against legislation to target inversions. Here's Rep. Chris Van Hollen (D-Md.), a key Democratic strategist:

"I think we need to keep pushing the issue with the public in order to shame Republicans (into taking action) -- though they appear to be totally shameless...  People are going to be drawing more and more attention to this issue. This should be a no-brainer. These companies are renouncing American corporate citizenship just to make a buck."

But there are substantial policy problems, as well. Start with this: For years, Republicans have insisted that an overhaul of the corporate tax code must move through Congress in tandem with a rewrite of the tax code for individuals. Most companies are not incorporated, and their earnings are taxed on the individual returns of their owners. As with corporate tax reform, the primary goal of Republicans is to lower the top individual tax rate, which now stands at 39.6 percent.

But Democrats fought hard during the 2012 "fiscal cliff" battle to raise the top rate, which is also paid by the very wealthy, and are not inclined to bring it back down again. If anything, they want tax reform to increase the burden on people at the top of the income spectrum to the tune of as much as $1 trillion over the next decade.

On this point, the parties are hopelessly gridlocked. Therefore, the White House has taken the position that they should forget about the individual code and focus on the corporate code, which might be easier to fix.

Some Republicans are open to that idea, particularly in the Senate. Sens. Rob Portman (R-Ohio) and Pat Toomey (R-Pa.) have been strong advocates of a corporate-only rewrite. If Republicans take control of the Senate in November, Toomey said, "I absolutely think we should make a very concerted effort to deal with this. .... I'd certainly be happy to settle for making progress where we can."

But some senior Republicans remain reluctant to separate corporate and individual tax reform, even as inversions create a sense of urgency around the need for the former.

Sen. John Thune (R-S.D.), a member of Senate GOP leadership, said that "some members in our conference would be open to that idea. But I don’t know how you do that without addressing S-corps and LLCs and pass-throughs and other types" of companies that are not incorporated. "I think you have to fix that, as well," he said. "Otherwise you create two separate classes of taxation."

The Republican House is more hostile to the idea. Rep. Pat Tiberi (R-Ohio), a senior member of the House Ways and Means Committee, said, "You have to do tax reform for everyone, or at least for all employers." Otherwise, he said, "I just don't know how you tell [small companies] that our multinationals are more important than they are."

As part of its plan to overhaul the corporate tax code, the White House has suggested changes to the individual code that would benefit smaller companies, particularly manufacturers. But Rep. Paul Ryan (R-Wis.), who is expected to take over the chairmanship of the tax-writing Ways and Means Committee next year, said he is not interested in that kind of compromise.

"Let’s see where we are in 2015," Ryan said in a brief interview before Congress left town last week. "I would like to see if the administration is willing to come around on more of a comprehensive look at tax reform so all businesses can benefit, not just the 20 percent of American businesses that are incorporated."

 

Lori Montgomery covers U.S. economic policy and the federal budget, focusing on efforts to tame the national debt.
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