Mar.Senate Finance Committee Examines Tax Reform Options
At a Senate Finance Committee hearing on March 6, members examined incentives for capital investment and manufacturing during discussions on tax reform options. Among the issues discussed were various manufacturing tax deductions, including the accelerated depreciation rate and domestic production activities deduction (PAD), and the potential expansion of the research and experimentation (R&E) tax credit to include job training activities.
In his opening statement, Chairman Max Baucus (D-Mont.) discussed the recent decline in manufacturing as a percentage of the U.S. economy. He noted that America’s depreciation rules “are some of the most generous among developed nations,” but added that they help offset the high statutory corporate tax rate in the U.S. Baucus insisted that the Committee and Congress determine whether the current incentives “adequately address” challenges to American manufacturing, or whether simpler, more effective ways are available to better encourage manufacturing investment in the U.S.
In his opening statement, Ranking Member Orrin Hatch (R-Utah) stated that part of the decline in U.S. manufacturing activity is due to offshoring, citing a recent survey of manufacturing companies who listed labor costs as the most important factor in selecting locations. Taxes rounded out the top four important factors companies consider when selecting a location. He called for a corporate tax rate reduction to a level that is more in-line with Organization for Economic Co-operation and Development (OECD) countries, before instructing Congress to “not lose sight of” overregulation as one underlying issue that makes the U.S. an “unnecessarily costly place to do business.”
Testimony
In her testimony, Jane Gravelle, Senior Specialist in Economic Policy at the Congressional Research Service (CRS), said U.S. statutory tax rates are “similar” to the OECD countries when “foreign rates are weighted to reflect the size of foreign countries,” and the discrepancy “almost disappears when measures of effective tax rates are considered.” Gravelle went on to explain the limited effects of investment subsidies, such as accelerated depreciation and PAD that “may not be very effective in stimulating investment.”
In his testimony, Ike Brannon, Director of Economic Policy & Congressional Relations at American Action Forum, said he finds it “uncomfortable when people say corporations don’t respond to incentives.” Tax reform without incentives, “would be a shame,” he added. The logical way to provide incentives for manufacturing is to allow for full and immediate expensing, he said.
Brannon said the U.S. “remains the only developed country to tax corporations based on their worldwide earnings.” Adopting a territorial approach, he argued, “would place our firms on a level playing field with their competitors.” Forcing companies to pay higher taxes on overseas profits will not result in increased U.S. exports, but will instead lead to the diminution of the company’s overseas operations, “with a concomitant reduction in employment here.”
In his testimony, J.D. Foster, Senior Fellow of Economics of Fiscal Policy at the Heritage Foundation, advocated for Congress to adopt a “do less harm” approach to help the economy grow. Businesses don’t need new incentives, and instead need fewer distortions and tax certainty, he argued. Foster added that a repatriation tax holiday does not create jobs and “is simply a portfolio shift on behalf of the shareholders.”
In his testimony, Robert Atkinson, President of the Information Technology and Innovation Foundation, said the U.S. measurement system for manufacturing output “is significantly flawed” and the decline in manufacturing investment can be attributed, in part, to the decline in capital stock over the last decade as manufacturers have invested faster overseas. U.S. multinational companies invest 73 cents for every dollar invested in the U.S., Atkinson said. Generous tax incentives for investment and lower effective corporate tax rates in other countries are some of the reasons cited by Atkinson behind the exodus of investment from the United States.
While some have noted that the reduction in corporate tax rates around the world acts as a “race to the bottom,” Atkinson said “the reality is that it is a race and failure of the United States to lower its effective corporate tax rate will mean continuing to lose the race.”
In response, Congress should retain or expand the domestic production deduction, maintain accelerated depreciation, expand the R&E tax credit to include expenditures on workforce training, and institute a “patent box” policy to allow for a significantly lower tax rate on corporate income from the sale of patented products which will support domestic manufacturing.
In her testimony, Michelle Hanlon, Associate Professor of Accounting at the Massachusetts Institute of Technology (MIT), spoke on financial accounting implications for publicly traded companies, which can influence the effectiveness of tax policies, including policies related to investment. In summarizing her testimony, Hanlon said companies respond less than predicted to bonus depreciation partly because the tax savings are not reflected on a firm’s accounting income statement, the Internal Revenue Code (IRC) Section 199 deduction was structured as a deduction at least partially because of financial accounting, and financial accounting provides an unintended, additional incentive for multinational companies to leave cash in offshore locations.
Question and Answer
International & Extraterritorial Issues
Baucus asked the panel to what impact tax policy has on a multinational corporation’s decision to manufacture in the U.S., and if a consumption tax should be part of the solution to tax reform.
Atkinson said higher corporate taxes reduce investment and foreign direct investment in the U.S. He noted that he does not see the worldwide reduction in corporate taxes as a “race to the bottom” but it is a race where the U.S. will find itself at a competitive disadvantage if tax reform is not addressed. Atkinson also said many countries are having difficulty taxing mobile activities and as a result, countries are moving more towards a consumption-based tax system. He added that a consumption tax should be part of the solution as “you can use it to lower corporate rates and you get it also border-adjustable.”
Sen. Ron Wyden (D-Ore.) asked Gravelle whether it makes more sense to get rid of a system that incentivizes deferral “and tries to compensate for it with [IRC Section 199],” and instead come up with a simple, competitive process with one rate.
Gavelle said the best way to keep investment from going abroad is to increase taxation on U.S. companies’ foreign source income and lower the corporate tax rate. She added that this is a way to encourage capital to stay in the U.S. without raising revenue.
Sen. Jay Rockefeller (D-W. Va.) touched on the “equality” in the tax code. Gravelle said since the corporate and individual income taxes are tied together, dramatically cutting the corporate tax will lead to a greater number of people looking to operate limited liability corporations. She referred to a Department of Treasury study in 2007 and said unincorporated income is close to 50 percent today.
Gravelle added that “there is a lot of international profit shifting,” and pointed out the fact that U.S. companies “had more profit in Bermuda than six times the GDP of Bermuda ….”
Baucus responded by asking the panel how to repatriate that money?
Gravelle said the easiest way is to “not go to a territorial tax,” but to a “current taxation with a limited cross-crediting of the foreign taxes, as in the Wyden-Coates bill, or a minimum tax,” that will keep companies from shifting income to zero tax rate countries. She added that her preferred route would be “a worldwide tax without deferral and with a per-country foreign tax credit limit that also separates royalties into separate baskets” that would impose U.S. taxes on the rest of the world. She cautioned that U.S. corporations may try to invert, but said the U.S. has been successful at preventing this.
The rest of the panelists disagreed with Gravelle’s view. Brannon said raising the effective tax rate on U.S. companies operating overseas will not lead to greater U.S. exports and more companies looking to shift production back to the U.S. Instead, these companies will likely sell their operations and remove themselves from the overseas country. Gravelle’s idea, Brannon continued, “simply assumes that U.S. companies operate overseas solely for tax reasons or to keep employment down in the U.S.”
Sen. Tom Coburn (R-Okla.) asked the panel to respond in writing to a question concerning the global effect of the U.S. non-territorial tax system, and its affect on investment and capital in the U.S.
Sen. Tom Carper (D-Del.) asked the panel to respond in writing for their thoughts on whether the U.S. should adopt a territorial system and whether there is a way to implement a system without incentivizing corporations to shift production overseas.
Other
Hatch referred to Hanlon’s testimony where she noted that lowering the corporate tax rate would cause a one-time reduction in a company’s reported earnings. He asked Hanlon whether the capital markets would understand this or whether Congress should keep this in mind when implementing a corporate tax cut.
Hanlon said there is a subset of companies that have deferred tax assets on their balance sheets that would be impacted if the corporate rate was reduced as the deferred tax assets are valued at the lower rate. However, she noted it is only a “one-time hit” to earnings and she hoped the markets would understand why this occurred. She noted that the United Kingdom and the state of Ohio have implemented measures to gradually reduce the corporate tax rate overtime to reduce the impact.
Coburn asked the panel what the corporate tax rate would need to be to reduce or eliminate the effect taxes have on influencing capital investment.
With the exception of Gravelle, Panelists agreed that corporate tax equality is not possible due to a globalized economy where countries set different rates. Foster said the corporate tax rate should be near the OECD average, while Brannon believed a rate around 20 percent would be an area where companies would be amenable to the removal of various tax incentives.
For additional information on the hearing, please click here.
At a Senate Finance Committee hearing on March 6, members examined incentives for capital investment and manufacturing during discussions on tax reform options. Among the issues discussed were various manufacturing tax deductions, including the accelerated depreciation rate and domestic production activities deduction (PAD), and the potential expansion of the research and experimentation (R&E) tax credit to include job training activities.
In his opening statement, Chairman Max Baucus (D-Mont.) discussed the recent decline in manufacturing as a percentage of the U.S. economy. He noted that America’s depreciation rules “are some of the most generous among developed nations,” but added that they help offset the high statutory corporate tax rate in the U.S. Baucus insisted that the Committee and Congress determine whether the current incentives “adequately address” challenges to American manufacturing, or whether simpler, more effective ways are available to better encourage manufacturing investment in the U.S.
In his opening statement, Ranking Member Orrin Hatch (R-Utah) stated that part of the decline in U.S. manufacturing activity is due to offshoring, citing a recent survey of manufacturing companies who listed labor costs as the most important factor in selecting locations. Taxes rounded out the top four important factors companies consider when selecting a location. He called for a corporate tax rate reduction to a level that is more in-line with Organization for Economic Co-operation and Development (OECD) countries, before instructing Congress to “not lose sight of” overregulation as one underlying issue that makes the U.S. an “unnecessarily costly place to do business.”
Testimony
In her testimony, Jane Gravelle, Senior Specialist in Economic Policy at the Congressional Research Service (CRS), said U.S. statutory tax rates are “similar” to the OECD countries when “foreign rates are weighted to reflect the size of foreign countries,” and the discrepancy “almost disappears when measures of effective tax rates are considered.” Gravelle went on to explain the limited effects of investment subsidies, such as accelerated depreciation and PAD that “may not be very effective in stimulating investment.”
In his testimony, Ike Brannon, Director of Economic Policy & Congressional Relations at American Action Forum, said he finds it “uncomfortable when people say corporations don’t respond to incentives.” Tax reform without incentives, “would be a shame,” he added. The logical way to provide incentives for manufacturing is to allow for full and immediate expensing, he said.
Brannon said the U.S. “remains the only developed country to tax corporations based on their worldwide earnings.” Adopting a territorial approach, he argued, “would place our firms on a level playing field with their competitors.” Forcing companies to pay higher taxes on overseas profits will not result in increased U.S. exports, but will instead lead to the diminution of the company’s overseas operations, “with a concomitant reduction in employment here.”
In his testimony, J.D. Foster, Senior Fellow of Economics of Fiscal Policy at the Heritage Foundation, advocated for Congress to adopt a “do less harm” approach to help the economy grow. Businesses don’t need new incentives, and instead need fewer distortions and tax certainty, he argued. Foster added that a repatriation tax holiday does not create jobs and “is simply a portfolio shift on behalf of the shareholders.”
In his testimony, Robert Atkinson, President of the Information Technology and Innovation Foundation, said the U.S. measurement system for manufacturing output “is significantly flawed” and the decline in manufacturing investment can be attributed, in part, to the decline in capital stock over the last decade as manufacturers have invested faster overseas. U.S. multinational companies invest 73 cents for every dollar invested in the U.S., Atkinson said. Generous tax incentives for investment and lower effective corporate tax rates in other countries are some of the reasons cited by Atkinson behind the exodus of investment from the United States.
While some have noted that the reduction in corporate tax rates around the world acts as a “race to the bottom,” Atkinson said “the reality is that it is a race and failure of the United States to lower its effective corporate tax rate will mean continuing to lose the race.”
In response, Congress should retain or expand the domestic production deduction, maintain accelerated depreciation, expand the R&E tax credit to include expenditures on workforce training, and institute a “patent box” policy to allow for a significantly lower tax rate on corporate income from the sale of patented products which will support domestic manufacturing.
In her testimony, Michelle Hanlon, Associate Professor of Accounting at the Massachusetts Institute of Technology (MIT), spoke on financial accounting implications for publicly traded companies, which can influence the effectiveness of tax policies, including policies related to investment. In summarizing her testimony, Hanlon said companies respond less than predicted to bonus depreciation partly because the tax savings are not reflected on a firm’s accounting income statement, the Internal Revenue Code (IRC) Section 199 deduction was structured as a deduction at least partially because of financial accounting, and financial accounting provides an unintended, additional incentive for multinational companies to leave cash in offshore locations.
Question and Answer
International & Extraterritorial Issues
Baucus asked the panel to what impact tax policy has on a multinational corporation’s decision to manufacture in the U.S., and if a consumption tax should be part of the solution to tax reform.
Atkinson said higher corporate taxes reduce investment and foreign direct investment in the U.S. He noted that he does not see the worldwide reduction in corporate taxes as a “race to the bottom” but it is a race where the U.S. will find itself at a competitive disadvantage if tax reform is not addressed. Atkinson also said many countries are having difficulty taxing mobile activities and as a result, countries are moving more towards a consumption-based tax system. He added that a consumption tax should be part of the solution as “you can use it to lower corporate rates and you get it also border-adjustable.”
Sen. Ron Wyden (D-Ore.) asked Gravelle whether it makes more sense to get rid of a system that incentivizes deferral “and tries to compensate for it with [IRC Section 199],” and instead come up with a simple, competitive process with one rate.
Gavelle said the best way to keep investment from going abroad is to increase taxation on U.S. companies’ foreign source income and lower the corporate tax rate. She added that this is a way to encourage capital to stay in the U.S. without raising revenue.
Sen. Jay Rockefeller (D-W. Va.) touched on the “equality” in the tax code. Gravelle said since the corporate and individual income taxes are tied together, dramatically cutting the corporate tax will lead to a greater number of people looking to operate limited liability corporations. She referred to a Department of Treasury study in 2007 and said unincorporated income is close to 50 percent today.
Gravelle added that “there is a lot of international profit shifting,” and pointed out the fact that U.S. companies “had more profit in Bermuda than six times the GDP of Bermuda ….”
Baucus responded by asking the panel how to repatriate that money?
Gravelle said the easiest way is to “not go to a territorial tax,” but to a “current taxation with a limited cross-crediting of the foreign taxes, as in the Wyden-Coates bill, or a minimum tax,” that will keep companies from shifting income to zero tax rate countries. She added that her preferred route would be “a worldwide tax without deferral and with a per-country foreign tax credit limit that also separates royalties into separate baskets” that would impose U.S. taxes on the rest of the world. She cautioned that U.S. corporations may try to invert, but said the U.S. has been successful at preventing this.
The rest of the panelists disagreed with Gravelle’s view. Brannon said raising the effective tax rate on U.S. companies operating overseas will not lead to greater U.S. exports and more companies looking to shift production back to the U.S. Instead, these companies will likely sell their operations and remove themselves from the overseas country. Gravelle’s idea, Brannon continued, “simply assumes that U.S. companies operate overseas solely for tax reasons or to keep employment down in the U.S.”
Sen. Tom Coburn (R-Okla.) asked the panel to respond in writing to a question concerning the global effect of the U.S. non-territorial tax system, and its affect on investment and capital in the U.S.
Sen. Tom Carper (D-Del.) asked the panel to respond in writing for their thoughts on whether the U.S. should adopt a territorial system and whether there is a way to implement a system without incentivizing corporations to shift production overseas.
Other
Hatch referred to Hanlon’s testimony where she noted that lowering the corporate tax rate would cause a one-time reduction in a company’s reported earnings. He asked Hanlon whether the capital markets would understand this or whether Congress should keep this in mind when implementing a corporate tax cut.
Hanlon said there is a subset of companies that have deferred tax assets on their balance sheets that would be impacted if the corporate rate was reduced as the deferred tax assets are valued at the lower rate. However, she noted it is only a “one-time hit” to earnings and she hoped the markets would understand why this occurred. She noted that the United Kingdom and the state of Ohio have implemented measures to gradually reduce the corporate tax rate overtime to reduce the impact.
Coburn asked the panel what the corporate tax rate would need to be to reduce or eliminate the effect taxes have on influencing capital investment.
With the exception of Gravelle, Panelists agreed that corporate tax equality is not possible due to a globalized economy where countries set different rates. Foster said the corporate tax rate should be near the OECD average, while Brannon believed a rate around 20 percent would be an area where companies would be amenable to the removal of various tax incentives.
For additional information on the hearing, please click here.