Is the business tax code ripe for overhaul?

Executive Summary

From burger and doughnut makers to pharmaceutical firms, companies moving their legal headquarters abroad have become avatars for a debate about the U.S. corporate tax system. On one side are business groups and their advocates who say these corporate “inversions” are symptoms of a business tax rate that is the highest in the developed world and a code that taxes all profits worldwide. On the other side are those, like the Obama administration, who argue that few companies pay the full rate and that inverters enjoy the benefits of the U.S. economic system without paying their fair share of the costs. As politicians, business executives and economists debate the future of the tax code, here are some of the issues under consideration: Does the current tax code dampen U.S. economic growth? Can the government take steps to keep U.S. companies from moving to foreign tax jurisdictions? Should the United States change the way it taxes foreign profits?

Resources

Bibliography

Books

Bartlett, Bruce, “The Benefit and the Burden: Tax Reform, Why We Need It and What It Will Take,” Simon & Schuster, 2012. A former official in two Republican administrations explains the obstacles to tax reform.

Birnbaum, Jeffrey H., and Alan S. Murray, “Showdown at Gucci Gulch: Lawmakers, Lobbyists, and the Unlikely Triumph of Tax Reform,” Vintage Books, 1987. Two Wall Street Journal reporters chronicle the political battles that led to the 1986 Tax Reform Act, widely considered the most comprehensive U.S. tax-reform legislation of the 20th century.

Smith, Stephen, “Taxation: A Very Short Introduction,” Oxford University Press, 2015. A professor of economics at University College London provides a brief yet thorough review of taxation, with a special emphasis on how it varies from country to country.

Steuerle, C. Eugene, “Contemporary U.S. Tax Policy,” Urban Institute Press, 2008. A senior fellow at the Urban Institute think tank provides what a Harvard University professor called “the bible on the last 25 years of U.S. tax policy.”

Sullivan, Martin A., “Corporate Tax Reform: Taxing Profits in the 21st Century,” Apress, 2011. A consultant and author for the publication Tax Notes argues that there is no economic justification for a corporate income tax but also explains why it is so difficult to eliminate.

Weisman, Steven R., “The Great Tax Wars,” Simon & Schuster, 2002. A historian traces the political fights that led to the adoption of the income tax in the early 20th century.

Articles

Johnston, David Cay, “U.S. Corporations Are Using Bermuda to Slash Tax Bills,” The New York Times, Feb. 18, 2002, http://tinyurl.com/gsmuoxr. A Pulitzer Prize-winning New York Times reporter details the beginnings of corporate tax inversions.

Kocieniewski, David, “Why Microsoft, With $100 Billion, Wants a Loan for LinkedIn,” Bloomberg Technology, June 13, 2016, http://tinyurl.com/ztewy32. A reporter looks at why one of the richest companies is limited by its decision to keep profits overseas rather than pay U.S. corporate taxes on them.

Mider, Zachary, and Jesse Drucker, “Tax Inversion: How U.S. Companies Buy Tax Breaks,” Bloomberg QuickTake, April 6, 2016, http://tinyurl.com/hconkvk. Journalists summarize the inversion debate and include year-by-year data and a list of the biggest transactions.

Olorunnipa, Toluse, and Angela Greiling Keane, “Obama Renews Carried Interest Tax Fight With Republican Help,” Bloomberg News, Sept, 16, 2015, http://tinyurl.com/hbopomo. Journalists provide an overview of the politics behind the debate on the taxation of investment managers’ “carried interest.”

Rubin, Richard, “U.S. Companies Are Stashing $2.1 Trillion Overseas to Avoid Taxes,” Bloomberg News, March 4, 2015, http://tinyurl.com/pv2azxw. A reporter chronicles the 299 companies with the most unrepatriated overseas profits as of the end of 2014.

Reports and Studies

“Corporate Income Tax: Effective Tax Rates Can Differ Significantly from the Statutory Rate,” U.S. Government Accountability Office, May 2013, http://tinyurl.com/k8fmthy. A government report found that for tax year 2010, profitable U.S. corporations paid U.S. federal income taxes amounting to about 13 percent of their pretax worldwide income.

“Fortune 500 Companies Hold a Record $2.4 Trillion Offshore,” Citizens for Tax Justice, March 4, 2016, http://tinyurl.com/h5gal95. A liberal group documents foreign profits on which Fortune 500 companies have yet to pay U.S. taxes.

“Whopper of a Tax Dodge: How Burger King’s Inversion Could Shortchange America,” Americans for Tax Fairness, December 2014, http://tinyurl.com/zqny2uf. A liberal group dissects how one corporation planned to reduce its tax bill with a corporate inversion.

Cole, Alan, “Corporate and Individual Tax Expenditures,” Tax Foundation, Aug. 3, 2015, http://tinyurl.com/h5rxh3e. An economist for the Tax Foundation, an independent research organization, explains what tax expenditures are and enumerates the largest ones.

Pomerleau, Kyle, “An Overview of Pass-through Businesses in the United States,” Tax Foundation, Jan. 21, 2015, http://tinyurl.com/jz35z5f. An economist for the Tax Foundation details how “pass-through” businesses are taxed in the U.S. system.

Rosenthal, Steven M., and Lydia S. Austin, “The Dwindling Taxable Share Of U.S. Corporate Stock,” Tax Notes, May 16, 2016, http://tinyurl.com/jupcr8q. Researchers estimate that the share of U.S. corporate stock held in taxable accounts fell more than two-thirds over the last 50 years, raising questions about the reality of double taxation of corporate income.

Toder, Eric, and Alan D. Viard, “A Proposal To Reform The Taxation Of Corporate Income,” American Enterprise Institute and Tax Policy Center, June 2016, http://tinyurl.com/jhq79pc. Economists from a liberal and a conservative group suggest a way to minimize the double taxation of corporations.

Next Step

Carried Interest

Mernit, Judith Lewis, “How the Carried-Interest Loophole Makes the Super-Rich Super-Richer,” Capital & Main, June 21, 2016, http://tinyurl.com/zt6unlk. A website investigating social and economic inequality explains how managers of certain funds are permitted to treat, for tax purposes, the bulk of their earnings as long-term capital gains rather than remuneration for services rendered.

Scheiber, Noam, “New York Legislators Plan to Introduce Measure on Carried Interest Tax,” The New York Times, March 6, 2016, http://tinyurl.com/jzp9y32. A coalition of New York state progressive groups is starting a campaign to close the so-called carried interest loophole allowing fund managers to pay a substantially reduced federal tax rate on much of their income.

Inversions

Rainey, Ryan, “GOP Senators Chide Treasury Dept. on Inversions Rules,” Morning Consult, July 5, 2016, http://tinyurl.com/h6ookuq. Seven Republican members of the Senate Finance Committee urged Treasury Secretary Jack Lew to significantly alter rules proposed in April that would curb companies’ ability to use cross-border debt funding to lower their U.S. tax bills.

Rubin, Richard, “Firms That Left U.S. Still Enjoy Perks,” The Wall Street Journal, June 13, 2016, http://tinyurl.com/jrwz3tj. A journalist finds that some U.S. companies that have legally moved overseas for tax purposes still receive U.S. government contracts and other advantages afforded to domestic companies.

Presidential/Congressional Proposals

Faler, Brian, “After much tax reform talk, House GOP finally agrees on a plan,” Politico, June 23, 2016, http://tinyurl.com/hc93rn8. House Republicans issue a blueprint for tax reform that it is less costly than the one proposed by presumptive GOP presidential nominee Donald J. Trump.

Jagoda, Naomi, “Hatch touts benefits of deduction for dividends,” The Hill, May 17, 2016, http://tinyurl.com/hhf3lax. The chairman of the Senate Finance Committee endorsed the benefits of integrating the individual and corporate tax systems by allowing companies to deduct dividends.

Qiu, Linda, “PolitiFact’s guide to the 2016 presidential candidate tax plans,” PolitiFact, April 7, 2016, http://tinyurl.com/jffafg3. The fact-checking website summarizes the presidential candidates’ proposals on corporate and other forms of taxes.

Territorial Tax System

Close, Cormac, “Why Corporations Would Love a ‘Territorial’ Tax – And You Shouldn’t,” OurFuture.org, Aug. 13, 2015, http://tinyurl.com/z59jqt9. A writer for a liberal think tank contends that a territorial tax system—in which domestic but not foreign income is taxed—would make the U.S. tax system even more distorted.

Katz, David M., “Cut U.S. Rates, Launch Territorial Tax System, Reports Contend,” CFO.com, March 11, 2015, http://tinyurl.com/hzuz9j4. A financial journalist summarizes two business groups’ studies arguing that a territorial tax system should be among the top priorities of federal tax-reform efforts.

Organizations

American Enterprise Institute
1150 17th St., N.W., Washington, DC 20036
202-862-5800
www.aei.org
Conservative pro-markets group that includes tax policy in its analysis.

Center on Budget and Policy Priorities
820 First St., N.E., Suite 510, Washington, DC 20002
202-408-1080
www.cbpp.org
Left-leaning group that analyzes the federal budget and taxes for their effects on low-income Americans.

Citizens for Tax Justice
1616 P St., N.W., Suite 200, Washington, DC 20036
202-299-1066
ctj.org
Liberal advocacy group that has published a number of studies on corporate taxation over its 37-year history.

Economic Policy Institute
1225 I St., N.W., Suite 600, Washington, DC 20005
202-775-8810
www.epi.org
Liberal think tank that focuses on low- and middle-income wage earners; has tax-related material at http://www.epi.org/research/taxes/.

Heritage Foundation
214 Massachusetts Ave., N.E., Washington, DC 20002-4999
202-546-4400
www.heritage.org
Conservative think tank with tax-related policy briefs at http://www.heritage.org/issues/taxes/corporate-income-tax.

Internal Revenue Service
1111 Constitution Ave., N.W., Washington, DC 20224
www.irs.gov
800-829-1040
The federal agency for tax collection and enforcement.

Joint Committee on Taxation
502 Ford House Office Building, Washington, DC 20515
202-225-3621
www.jct.gov
Nonpartisan committee of the U.S. Congress.

Tax Foundation
1325 G St., N.W., Suite 950, Washington, DC 20005
202-464-6200
www.taxfoundation.org
Right-leaning tax-policy research organization.

Tax Policy Center
2100 M St., N.W., 4th Floor, Washington, DC 20037
202-833-7200
www.taxpolicycenter.org
Left-leaning tax-policy research organization; joint project of the Urban Institute and Brookings Institution.

U.S. Government Accountability Office
441 G St., N.W., Washington, DC 20548
202-512-3000
www.gao.gov
Independent federal agency that includes taxes among its many topics of examination on behalf of Congress.

DOI: 10.1177/237455680215.n1