Senator Max Baucus (D-MT), Chairman of the Senate Finance Committee, recently released three detailed discussion drafts covering international corporate tax reform, administration, and cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. . These are very complicated proposals, and we’ll have more to say about them in the days and weeks ahead, but here are some important big picture items to keep in mind.
First, these are very complicated proposals. International taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and cost recovery are two of the most complicated areas of the corporate tax code, and Senator Baucus has apparently made an effort to simplify matters. Nonetheless, it takes the Joint Committee on Taxation (JCT)The Joint Committee on Taxation (JCT) is a nonpartisan congressional committee in the United States that assists both the House and Senate with tax legislation. The JCT is chaired, on a rotation, by the Chair of the Senate Finance Committee and the Chairman of the House Ways and Means Committee. 85 pages to describe Senator Baucus’s international proposal and 70 pages to describe his cost recovery proposal.
Second, the main idea of these proposals, at least on international and cost recovery, is to raise money to “pay for” a lower corporate tax rate. JCT has not officially scored these proposals yet but expect at least $1 trillion in new revenue over 10 years. That’s what it would take to lower the corporate tax rate to 25 percent and move to an international corporate tax system more akin to our trading partners. We believe the entire effort to “pay for” a lower corporate tax rate is misguided, as it’s premised on Congress’s static scoring rules, which assume away any effect of taxes on economic growth, investment, labor supply, etc. Economists have long understood that the corporate tax is particularly damaging to economic growth. Our Taxes and Growth Model takes this into account and shows that cutting the corporate tax rate would boost GDP, investment, and wages to such an extent that it would also boost total federal tax revenue.
Third, in practice, the major effect of the international proposal would be to shift the corporate tax burden to U.S. businesses operating abroad (i.e., multinational corporations). However, the major problem with our current international tax system is that it’s uncompetitive, causing many multinationals to leave the U.S. to escape the developed world’s most punitive corporate tax. The plan outlined in the discussion drafts will make matters worse, mainly by eliminating deferral without fully moving to an exemption system.
Fourth, the major effect of the cost recovery proposal would be to shift the corporate tax burden to U.S. manufacturers and other capital-intensive companies. Meanwhile, the major problems with the U.S. economy are sluggish investment and capital formation. This proposal will make matters worse by reducing capital cost recovery, which will push more manufacturing abroad, hurting blue-collar workers and shrinking investment and GDP.
Currently, business taxes are too high and complicated, which suppresses business investment, worker productivity, wages, and GDP. Overall, the proposals from Senator Baucus’s discussion drafts fall short in addressing the big problems with the U.S. tax code.
Click to read the summary of Senator Baucus's draft on international or cost recovery.
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