I recently attended the Capital Matters conference, presented by the Tax Council Policy Institute in Washington. The 2016 conference focused on how taxes influence the global creation, deployment, and mobility of capital. This was my second year attending the conference, which showcases the best thinking of influential tax professionals and business leaders. And both years offered a glimpse into how the corporate world views the tax world. What a view!
Last year I listened as CEOs, CFOs, and the professionals who advise them expressed concerns about the OECD’s yet-to-be-completed BEPS project. They wondered whether the OECD would actually make wholesale changes to the transfer pricing guidelines, and speculated on how any forthcoming new rules on treaties and permanent establishment would affect their bottom line. They expressed concerns about how country-by-country reporting would alter resource allocation. Many tax directors were nervous about how they could meet new reporting requirements without jeopardizing the confidentiality of their proprietary business and tax information.
Beyond the inexorable march of the BEPS project, one theme that united conference participants in 2015 was the urgent need for the United States to reform its corporate and international tax laws to meet foreign competition, and enable U.S. businesses to succeed in the global economy. In keynote speeches to the conference, elected officials from both parties channeled those concerns and pledged to work together to reform the tax code.
It is now 2016. And depending on where you sat and whom you talked with, this TCPI conference appeared to resemble, at least in part, the movie Groundhog Day. Tax directors and planners representing the full spectrum of American industry – in terms strikingly similar to last year – decried the way the U.S. taxes business. Presenters offered many thoughtful solutions: lowering the corporate tax rate, expensing capital investments, providing tax incentives to encourage or support innovation, moving the U.S. to a territorial system, or eliminating corporate taxation altogether.
One part of this year’s conference, the Thursday morning panel of economists, may help explain why (despite near unanimous consensus that the U.S. corporate tax system desperately needs an overhaul) nearly every discussion of the subject ends the same way, with nothing. Providing a sobering dose of reality, the economists generally agreed that the list of corporate reforms that are trotted out each year can be achieved in a revenue-neutral way only if the revenues lost from those reforms are recouped by changing other parts of the tax code in ways that shift taxation to workers, consumers, or other businesses. A zero-sum game by any other name . . .
Compounding the problem this year is the fact that 2016 is an election year. And in an election year, no one running for Congress wants to pass any legislation that an opponent on either side of the political spectrum can use in a negative campaign ad. I call this the election year corollary to Newton’s First Law of Motion. Newton said that a body at rest tends to stay at rest. The corollary holds that, in an election year, a Congress at rest actually stays at rest. And so it is entirely reasonable to view each discussion of U.S. corporate tax reform through the lens of Groundhog Day.
The rest of the world, in contrast, has leaped ahead of February 2. Countries with parliamentary systems, like the U.K. and Ireland, have lowered corporate tax rates and adopted other business-friendly tax measures almost overnight. Still other countries are benefiting from the U.S. inertia.
Which leads to the most important question: When will U.S. policymakers wake up and realize that hearing the same familiar song every morning is a sign that things are seriously wrong and need to change?