Ways and Means Profit Shifting Hearing Further Clarifies Need for Comprehensive Tax Reform

June 13, 2013

The common theme of a broken tax system laced its way through today’s Ways and Means full committee hearing on Tax Havens, Base Erosion and Profit Shifting. Chairman Dave Camp (R-MI) made clear from the onset of the hearing that there is no perfect tax code, but that our current code has proved to be a hindrance to economic growth and global competitiveness.

“Nearly all have offered a universal observation,” Chairman Camp said. “Having the highest corporate rate in the developed world along with an outdated international tax system is a barrier to success that leaves our country falling further behind our foreign competitors.”

The hearing presented little new or revolutionary information, but clarified the need for comprehensive reform instead. The Apple hearing from a couple weeks ago began the conversation on profit shifting that this hearing continued. But these hearings do more to shed light on a flawed system that creates the incentives to create elaborate tax planning processes, instead of the companies that operate within that system.

“These activities are the consequence of bad laws, not bad companies,” Chairman Camp said in his prepared statement.

The witnesses offered a broad consensus that this is the case. The weakness in the structure of the system is due to two main components: the highest corporate tax rate in the developed world and the U.S. system of worldwide taxation.

Professor Kleinbard of USC Law School proposed cutting the rate to 25 percent to place it in the middle of the pack. But Paul Oosterhuis suggested that a 25 percent rate might not be low enough, stating that a 25 percent rate would risk the competitiveness of U.S. companies over time.

But with the issue of international taxation, the rate is not all that matters.

“We live in a global economy, and that is not going to change,” Ranking Member Sandy Levin (D-MI) said in his opening remarks.

Pascal Saint-Amans, the Director at the OECD’s Centre for Tax Policy and Administration, made the point that 10 more countries have transitioned to territorial taxation over the last decade, which brings the total to 28 of 34 member countries.

As globalization continues, a fair playing field among U.S. companies and their competitors becomes ever more important – Apple competes with Samsung, Ford and Chevrolet compete with Toyota and Land Rover. The current tax system puts these American companies at a disadvantage on the international basis.

It also prevents U.S. companies from reinvesting $2 trillion of foreign earnings back in the U.S. Here’s how this works: if a U.S. company operating in the U.K. earned $100 in profit, they would pay $23 in taxes to the British to cover their 23 percent corporate tax rate. If that company wants to bring that profit back home, they have to pay an additional $12 tax to cover the difference between the British rate and the U.S. rate; OR they can reinvest that money anywhere else in the world at no additional cost. With over 95% percent of the world’s population outside the U.S., it’s not worth the addition 12 percent tax, so the money stays out of the country.

If Congress wants a reform that limits companies use of tax havens and profit shifting, it needs to create a simpler system with a lower rate that encourages companies to invest and reinvest in America. It goes back to what Congressman Levin said, we live in a global economy, and that’s not going to change. This means the U.S. tax code needs to change instead.

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