Tax Analysts Blog

Beware the Slayer of Tax Reform Fantasy

Posted on Mar 17, 2016

Call me a curmudgeon, but I don’t understand the fascination with video games. I acknowledge that the visual imagery is impressive. But if you’re over a certain age, shouldn’t you have more productive things to do with your time?

These days, one can’t watch the evening news without enduring crass commercials that induce gamers to drop what they’re doing and plunge headfirst into digital flights of fancy. Perhaps you’ve seen the one with Arnold Schwarzenegger ordering pretend commando raids from his smartphone. Or the one depicting Kate Upton traipsing around a Gothic castle until she mounts a stallion and leads her pretend army into combat against fire-breathing dragons.

When I was a kid we had Pong.

Bodacious fantasy was also in ample supply on Capitol Hill earlier this month, at a House Ways and Means Committee hearing on corporate tax reform. As important as tax reform is, we really don’t need further congressional hearings on it. Talk therapy won’t help. Everyone in Washington already knows what grown-up tax reform will look like. It looks like the Dave Camp bill.

The whole point of the recent hearing, it seemed, was to float the idea that tax reform need not be revenue neutral. Even with the considerable benefit of dynamic scoring, some of the tax proposals being discussed inside the Beltway are huge revenue losers. One example is a generous innovation box that, curiously, rewards past research expenditures with new tax preferences.

Lawmakers are trying to validate the notion that it’s perfectly acceptable for tax reform to lose a phenomenal amount of money -- in the same vein, I suppose, that it’s perfectly acceptable for your 27-year-old to squander his life away, sprawled out on the couch pretending to disembowel digital zombies. Junior needs to get a grip on reality, and so does Congress.

Not paying for tax reform is a terrible idea. It’s also a cop-out. True, coming up with revenue raisers requires tough decisions and political risks that few legislators are willing to take. (Camp was a notable exception.) That said, facing up to tough decisions is an essential part of governance.

So let’s remind Congress that tax reform (if it ever happens) will be revenue neutral. It will also be distributionally neutral, or darn close to it. And that assumes we’re not trying to reduce the deficit. If we were, tax reform would need to raise revenue. Sorry for being a killjoy. At least I’m not alone. One of the witnesses at the hearing was also willing to dispense with happy talk: Edward Kleinbard.

Kleinbard, a former chief of staff with the Joint Committee on Taxation, is now a professor of law and business at the University of Southern California. Regular readers of Tax Notes may know him best as the person who coined the phrase “stateless income.” I recently spoke with Kleinbard for our weekly newscast, Tax Notes Live. If you missed our conversation, you can access it here. You can read his congressional testimony here. In it, Kleinbard takes on what he views as the “false narrative” of today’s tax reform debate.

Kleinbard agrees that the U.S. statutory rate should be lowered, but he isn’t buying the idea that it renders U.S. firms uncompetitive. Ditto for the international corporate regime, which relieves double taxation through a foreign tax credit. Kleinbard blasts recent proposals to exempt foreign profits as “cartoon territoriality.” He questions whether we need a territorial regime when U.S.-based multinationals like Alphabet (i.e., Google) enjoy a 6.3 percent tax rate on their $12 billion of annual foreign profits. Kleinbard also thinks the actual harm resulting from locked-out foreign profits is vastly overstated.

In short, Kleinbard believes U.S. multinationals generally pay non-U.S. tax at effective rates that are the envy of their foreign competitors. You might not agree with everything Kleinbard has to say, but his arguments can’t be easily ignored.

 

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