Vermont Sen. Bernie Sanders introduced a corporate tax bill earlier this month. Unsurprisingly, it cuts in a different direction than most tax proposals floating around Washington these days.
The bill (S.922) is titled the Corporate Tax Dodging Prevention Act of 2015. A companion bill was introduced in the House by Illinois Rep. Janice D. Schakowsky. You can access the full text of the bill here. It was introduced at the same time as a new tax policy report from the U.S. Public Interest Research Group titled “Picking Up the Tab 2015: Small Businesses Pay the Price for Offshore Tax Havens.” You can read the report here.
Let’s get one thing out of the way first: This is not an attempt at tax reform.
Rather than overhaul the tax code, Sanders would patch perceived loopholes that allow multinational firms to pay relatively little tax. I use the phrase “perceived loopholes” because the things he wants to eliminate are best understood as intentional subsidies to corporate taxpayers. (I prefer to limit the term “loophole” to those situations in which tax rules give rise to unintended benefits.)
The bill makes no attempt to be revenue neutral. The accompanying press release claims it would raise about $590 billion in new tax revenue over the next decade. There is no rate reduction, only base broadening – especially regarding the foreign activities of U.S.-based multinationals. In short, the bill represents a tax hike on a specific category of income that currently benefits from favorable treatment.
If enacted, the bill would implement six major changes:
• Eliminate deferral, meaning all corporate income (foreign or domestic) would be taxed on an accrual basis;
• End practices that allow firms to artificially inflate or accelerate foreign tax credits;
• Toughen corporate residency rules to prevent U.S. firms from claiming foreign status by using tax haven post office boxes as their place of business;
• Enact stricter anti-inversion rules;
• Prevent income stripping by limiting the deductibility of interest payments to related parties; and
• Prevent oil companies from disguising royalty payments to foreign governments as income taxes and thereby claiming foreign tax credits.
The legislation obviously isn’t going anywhere in this Congress. Its lasting influence might be that it conveniently identifies $590 billion in revenue raisers that could become relevant if we ever get serious about tax reform. Even under those circumstances, however, these proposals are likely to have limited appeal. Here’s why.
Reviewing the six bullet points above, we can infer how Sanders thinks an ideal corporate tax system should function: A firm’s foreign activities should not receive preferential treatment relative to its domestic activities. He would tax the two categories of income as economic equivalents. The technical name for this orientation is capital export neutrality.
Stated differently, a dollar of capital invested domestically should suffer the same tax burden as a dollar of capital invested abroad – otherwise, bad stuff happens. A tax system that ignores this principle would implicitly favor economic returns on capital deployed in foreign markets over capital deployed at home. And that would provide incentives for creating foreign employment relative to domestic employment. Or so the theory goes.
The concept isn’t necessarily wrong so much as antiquated.
Don’t tell the AFL-CIO, but it’s difficult to reconcile capital export neutrality with today’s global economy, capital mobility, and the emphasis governments place on tax competition. Most other countries threw in the towel on capital export neutrality a while ago. Looking at how subpart F has been neutered over the years, the United States doesn’t seem serious about it either. One can quibble about whether that was a colossal mistake (Sanders clearly thinks it was), but that’s where we are.
For better or worse, many policymakers today take it for granted that foreign investment must be subsidized through the tax code. (The debate tends to focus on the size and mechanics of the subsidy, not its existence.) Even President Obama’s proposal for minimum tax on foreign profits features a significant built-in tax preference relative to domestic profits. The cynic in me thinks the whole purpose of Sanders’s bill is to make Obama’s tax proposals appear more palatable to corporate America.
That’s classic Bernie -- calling it as he sees it and swimming against the tide of conventional thinking. I’m sure he wouldn’t have it any other way.