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Thought Leadership

GOP Tax Reform Plan

The House GOP weighed last week on the developing debate over comprehensive tax reform with a policy paper that laid out some proposals for tax reform in the broader context of jobs growth. As the contours of the debate in Washington over tax reform begin to become visible, this update will review the developments in this area so far and provide a perspective on upcoming action. 

 

Below is an update on various tax reform proposals currently being floated in Washington related to the following key areas:

 1) corporate tax rates; 

 2) individual tax rates; and 

 3) taxes on international earnings.      

 

Corporate Tax Rates

 

Despite the partisan gridlock on Capitol Hill, officials on both sides of the political aisle agree that perhaps the best opportunity for bipartisan cooperation this Congress exists in the area of corporate tax reform.

 

Last December, the bipartisan National Commission on Fiscal Responsibility and Reform, co-chaired by former U.S. Senators Erskine Bowles (D-NC) and Alan Simpson (R-WY), jump-started the debate by recommending a lowering of the current 35 percent top corporate tax rate to a single tax rate between 23 percent and 29 percent, paid for through the elimination of $1.1 trillion in so-called “tax expenditures” that benefit particular industries or business investments.

 

President Obama followed-up in February by releasing his Fiscal Year (FY) 2012 Budget request that called for a simplification of the U.S. tax code and a deficit-neutral plan for lowering the corporate tax rate through the elimination of tax expenditures.  Treasury Secretary Timothy Geithner has since been tapped by President Obama to take the lead in drumming up support within the business and labor communities. 

 

Treasury Department is now expected to release a highly-anticipated white paper on corporate tax reform in the coming months, although it remains uncertain as to how detailed the proposal will be.  Many expect the white paper to be unveiled after the completion of a deficit reduction deal that is currently being negotiated by Vice President Biden and a bipartisan group of lawmakers ahead of an Aug. 2 deadline to increase the federal debt limit.  Vice President Biden publicly stated this week that a deficit reduction package will have to include increased revenue through changes to the tax code, despite strong Republican opposition to any revenue increases outside of spending cuts.

 

On April 15, the full House passed – on a party-line vote of 235-193 -- an FY12 budget resolution crafted by Budget Committee Chairman Paul Ryan (R-WI) that would lower to 25 percent the top tax rate for corporations, and direct the Ways and Means Committee to eliminate unspecified corporate and individual tax breaks.

 

Although the House GOP budget failed in the Senate this week by a vote of 40-57 – largely due to the inclusion of controversial cuts in both discretionary and non-discretionary spending --  corporate tax reform still carries bipartisan support in the Senate.  For example, on April 5, Sens. Ron Wyden (D-OR), Mark Begich (D-AK) and Dan Coats (R-IN) introduced the Bipartisan Tax Fairness and Simplification Act of 2011 (S.727), which would lower the corporate tax rate to 24 percent through tax expenditure elimination.

 

Sources on Capitol Hill believe that stand-alone corporate tax reform legislation is unlikely, as the White House and Senate Democrats will likely leverage the bipartisan support for reform by attaching such a proposal to a deal on the FY12 budget or a long-term package to reduce federal deficits. 

 

Individual Tax Rates

Although the Obama administration supports lowering the corporate tax rate below 30 percent, they have not endorsed House Republicans’ position – led by Ways and Means Chairman Dave Camp (R-MI) -- that comprehensive tax reform must also include reforms to the individual tax system.  Rep. Camp and his GOP colleagues are concerned that an exclusion of individual tax rates would negatively impact S Corporations and partnerships whose profits “flow through” to individual owners. 

 

President Obama’s FY2012 budget calls for the expiration – on December 31, 2012 -- of the 2001 and 2003 Bush tax cuts individuals with household incomes above $250,000.  However, Congressional Republicans and several moderate Senate Democrats have deemed any tax increases as a “non-starter.”

 

Both the FY12 House Republican Budget and the newly-released House GOP policy paper call for lowering the top individual tax rate to 25 percent; while the Bowles-Simpson Commission recommends a top tax rate between 23 percent and 29 percent.  

 

Sources on Capitol Hill view the contrasting approaches between the White House and congressional Republicans on individual tax rates as perhaps the most significant hurdle moving forward.   

 

Taxes on International Earnings

Recent reports have also indicated that Obama administration officials are currently debating and analyzing a potential shift from the current worldwide system of taxation in which earning generated overseas are taxed, to a “territorial” tax system where taxes would only be levied on income earned within U.S. borders.  This approach was also recommended by the Bowles-Simpson Commission

 

On May 24, the House Ways and Means Committee conducted a hearing to explore the issue of international taxation.  In announcing the hearing, Chairman Dave Camp said, “Many of our major partners have already reformed their tax laws in ways they believe help their companies expand their global operations and in turn support good-paying jobs within their own borders.  To make American employers and workers more competitive in the global market, we would be wise to examine those reforms and consider if such rules would be appropriate for the United States.”

 

As a more targeted approach, House Republicans are also pushing for a “repatriation tax holiday” bill that was introduced in the House last week.  On May 11, senior Ways and Means Committee member Kevin Brady (R-TX) joined three Democrats and two Republicans to introduce the Freedom to Invest Act of 2011(H.R. 1834), legislation that would lower the tax rate on repatriated earnings of multinational companies from 35 percent to 5.25 percent for one year, in either 2011 or 2012.  The bill is strongly supported by House Majority Leader Eric Cantor (R-VA) who argues that the legislation would unleash more than $1 trillion that U.S. businesses are holding offshore. 

 

No companion legislation has been introduced in the Senate, although the proposal is supported by several Democrats, including Sens. Diane Feinstein and Barbara Boxer of California.  U.S. technology companies such as Adobe, Apple, Google, and Microsoft have taken the lead in advocating for a repatriation tax holiday through the coalition WinAmerica.

 

Supporters of a repatriation tax holiday view this approach as an interim step to boosting U.S. job and economic growth ahead of broader comprehensive tax reform deal that may require a protracted debate.  During a conference call with reporters last week, Rep. Brady said that a major tax overhaul is “not likely to happen for several years” and that a tax holiday would be “a major investment into the economy now when we need it most.”  Rep. Brady’s position is one that has also been reiterated by Majority Leader Cantor.  

 

Rep. Camp and Senate Finance Committee Ranking Member Orrin Hatch are both skeptical of pushing a repatriation tax holiday outside of a comprehensive tax code overhaul, a position shared by the White House. 

 

Outlook

Since the tax reform discussions are intertwined with the broader debate over the U.S. fiscal condition, the situation remains both dynamic and fluid, as multiple players in the Obama administration, Congress, and the business community continue to weigh in through various policy proposals.