With slow job growth, anemic economic growth at 1.8%, and a looming debt crisis, the United States is searching for answers.
One of the solutions offered is individual and corporate tax reform.
In his State of the Union address, President Obama stated he was in favor of cutting the corporate tax rate to spur job growth. There is broad political agreement that something needs to get done, but narrow support for changing major components of the tax code.
Given this, what are the prospects for tax reform?
The debate breaks down along party lines and three key questions need to be settled.
- One, will the reform be revenue neutral (White House) or will it be non-neutral (House of Representatives)?
- Two, will the reform link individual and corporate reform together (House) or can corporate reform proceed on its own (WH)?
- Three, can there be an agreement for everyone to "jump off the bridge together" by jointly losing their subsidies/tax expenditures or will it devolve down into "I got mine" attitudes?
A subset of these questions is whether an individual piece of legislation to reform the tax code can proceed on its own and get passed. This week, we had a perfect example when the Senate brought up a controversial bill to strip out $21 billion in subsidies for the oil and gas industry. The bill fell short of the 60 votes needed to advance it with a 52 against 48 for vote.
Here's a more detailed look at another stand alone piece of legislation: the dividend repatriation bill.
Recently, a senior Republican tax writer on the House Ways and Means Committee introduced legislation that would give U.S. companies one year to bring home at a lower tax rate as much as $1 trillion in profits parked overseas according to Bloomberg. "The bill's author, Representative Kevin Brady, a Texas Republican, describes the proposal as a jobs measure. The proposal, which repeats a 2004 law, would allow U.S.-based companies for one year to repatriate income earned overseas at a 5.25 percent rate, instead of the 35 percent statutory corporate rate."
In a sign of support, the bill has three Democratic sponsors and has the support of House Majority Leader Eric Cantor. Cantor said, "While fundamental tax reform will take time, repatriation is an interim step that we can take to encourage businesses to bring investment back into our country. Such a step adds capital that would otherwise go overseas directly into our economy which will help create jobs, investment, and growth."
Unfortunately, the bill is opposed by the Obama administration and the US Treasury Department has blogged against it. On April 15th, the Joint Committee on Taxation wrote a 15 page paper requested by Rep. Lloyd Doggett that stated, "Finally, it may be helpful if we consider the interaction of proposals like yours with some broader tax reform ideas. As noted above, it is our view that each of your stand-alone proposals creates a system within a system, contributing to the overall negative revenue results presented above." In other words, they didn't like it on its own.
The problem with much of the negative bill analysis is that it assumes repatriation eventually of the $1 trillion sitting off-shore at 35%. Sadly, this is an unlikely event as the CEO's of these companies keep the money there indefinitely as they don't want to pay the tax. Also, this has the perverse effect of encouraging these companies to build plants overseas to put their cash to work wherever it's being held.
Whether this piece of legislation is included in a larger bill or is done on its own is unknown at this time, but the odds favor it being included in a fundamental tax reform bill. However, the fact that this bill has gotten as far as it has is a major positive and bodes well for it. It is one piece of the tax puzzle that needs to be corrected to reduce barriers for investment in domestic capital expenditures.
The longer the United States struggles with unemployment, weak growth and deficit reduction, the more pressure builds for a restructuring of the US tax code to solve to these problems.
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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.