Experts Foresee No Tax Overhaul in United States
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Version 0 of 1. If there is widespread agreement on anything in Washington, it is that the tax code is absurdly complex and should be simplified. There seem to be loopholes and exemptions to each of the myriad rules, regulations and formulas, and each loophole seems to have a loophole of its own that brings taxpayers back full circle and forces compliance with the original provision. But while few dispute that tax reform is a good idea, it is an idea that policy specialists doubt will be acted upon soon. Overhauling such a byzantine compilation of laws and procedures may be just too difficult to achieve, they say, and some leaders whose support matters most for success may lack the will to see it through. “It’s hard to believe that anything much is going to happen” in coming months, said Michael Graetz, a professor at Yale University Law School who had policy-making roles in two presidential administrations. Representative David Camp, Republican of Michigan, who is chairman of the House Ways and Means Committee, the body responsible for originating tax laws, “has been working on tax reform and is anxious to press ahead,” Mr. Graetz said, “but it’s not at all clear that the leadership in the House or Senate has much enthusiasm for it.” One niche for which there is thought to be a fighting chance of significant change is corporate taxation. After rate cuts in Japan take effect in April, the United States will have the highest corporate tax rates in the world, factoring in state and federal liability. Republicans and Democrats agree that because American businesses are taxed at U.S. rates even on foreign profits, they suffer a competitive disadvantage abroad. But a quirk of the tax code allows American companies to defer paying tax on foreign profits until the profits are brought home. That leads companies to structure their affairs so that they record more profits abroad, particularly in lower-tax countries, temporarily denying revenue to the Treasury. The practice could be curtailed, a study of U.S. multinationals published in January by the Congressional Research Service suggests, by cutting the 35 percent top corporate rate. “Reducing this rate would decrease the incentive to shift profits by reducing the tax savings such behavior would produce,” the study concluded. Companies shift profits “to take advantage of the differential between the U.S. tax rate and rates in low-tax countries,” it said. “By reducing this discrepancy, the incentive to shift profits would be reduced as well.” Stephen Entin, a senior fellow at the Tax Foundation, a Washington research concern, also encourages Congress to lower corporate tax rates, and he recommends taxing American companies on domestic profits only. Those moves would produce “all kinds of synergies,” he said, like improving competitiveness, eliminating the incentive to keep foreign profits abroad and making it less advantageous for U.S. companies to relocate. As desirable as such change might be, Mr. Graetz cites an impediment that could make it about as unlikely as an overhaul of individual taxation. Many businesses are set up as partnerships or other entities that are taxed as if their profits were income that accrued directly to the participants. Top tax rates went up in January to 39.6 percent, he pointed out, so while reducing corporate rates may be sensible and fair, increasing the gap in rates between corporations and other business entities would be problematic. “It’s very hard to do corporate tax reform without dealing with partnership issues,” he said. “You can’t have two sets of deductions and other rules.” For that reason, he added, Mr. Camp has said that individual and corporate overhauls have to be a package deal. If such an initiative gathered momentum, Mr. Entin warned, there could be a threat to the foreign earned income exclusion, the provision that allows big chunks of salaries and business income of Americans living abroad to escape taxation. Almost no other country taxes nonresident citizens, so the exclusion “is perfectly normal on a global scale,” he said, “but congressmen might think, ‘Let’s close it down and we’ll get $5.7 billion a year.”’ But thinking may be as far as they get. Mr. Entin, like Mr. Graetz, is skeptical that a serious effort to revamp the tax code is looming. At least for that provision, no news could be good news, and not just for expatriate Americans, but also for their employers. “It would be difficult for American companies abroad” if the exclusion ended, Mr. Entin said. “They would have to pay expatriates more, so they might send someone from Canada to the Paris office instead of someone from New York. Then the revenue disappears. It’s never going to be what they think it is by closing that so-called loophole.” |