Sherrod Brown's OpEd on Fixing Our Broken Tax Code (Its GOOD) - Add your voice!

[RiverLover]

Fixing a broken tax code
by Sherrod Brown

As a Cleveland Indians fan, I have grown used to saying “wait until next year.”

But as a legislator, this saying infuriates me – particularly when it comes to our tax system. Our tax code is so broken that it creates incentives for multinational corporations to move jobs and profits overseas – profits they’d like to return to the U.S. and revenue that our Treasury needs.

But as a member of the Senate Finance Committee, I’ve seen targeted Democratic and Republican tax reform efforts stifled due to the hope of comprehensive tax reform in the future, a future that is always way over the horizon.

In baseball, hope can triumph over reason. But as policymakers, we have an obligation to act when opportunity presents itself, rather than wait for next season.

And right now there is a political opportunity to solve two of America’s pressing economic problems at the same time.

Over the past several months, I worked with Democrats and Republicans on a special International Tax Reform Working Group to explore challenges facing our international tax system.

In our current system, nobody wins. American corporations can legally shift profits overseas to avoid taxes in the U.S.

Not only does this deprive our tax base of needed revenue, but it also prevents these same corporations from accessing profits to invest in the U.S. or return money to shareholders. Meanwhile, foreign companies that are able to access American companies’ overseas cash threaten to take over U.S. corporations.

At the same time, our trust fund for infrastructure projects is nearly empty.

Our roads, bridges, rail lines, and ports are in need of critical repairs to ensure that American commuters can efficiently get to work and that American businesses can transport and sell their products. For years now we have needed a long-term highway bill with increased investment, but have been forced to settle for the lowest political denominator of short-term, flat-funded patches.

Later today at the Cleveland City Club, I’ll outline a bipartisan path forward. Earlier this month, our International Tax Working released a bipartisan framework to reform international taxes and generate needed revenue to pay for long-term and robust infrastructure improvements. At the same time, the Chairman of the Ways and Means Committee, Rep. Paul Ryan, began similar discussions with the White House.

Here’s how reform would work: we would create a new, simplified international corporate system that eliminates incentives to offshore profits.

First, the new system would allow corporations to pay taxes in the country in which they were earned.

Second, we would eliminate tax havens by creating a county-by-county global minimum tax. This means that if a company is manufacturing products in a foreign nation for sale in a foreign country, they would pay nearly all of their tax to that foreign country and then be free to use their profits as they see fit. But if a company is moving profits to a tax haven and generates little economic activity in that nation, than it would owe the U.S. the minimum tax immediately.

Third, the new system should include robust incentives to locate R&D jobs and manufacturing in the U.S.

This new system would allow corporations to make investments driven by economics – and not tax arbitrage – while introducing new rules to prevent them from using debt structuring to hide profits generated in the US. Finally, this new system would allow the return of nearly two trillion dollars in profits stranded overseas through a one-time tax. That tax would be used to fund a long-term transportation bill at the increased levels our country needs.

We know that a reasonable tax on locked-out, overseas funds is enough to pay for pressing infrastructure needs across our country. In my home state of Ohio, the Brent Spence Bridge – which connects Ohio and Kentucky and moves goods totaling 4 percent of our GDP each year – has been described as “dangerous” and “obsolete.” There are similar “Brent Spences” around the entire nation that also need repair now.

With a pressing deadline to shore up our infrastructure trust fund, now is the time to act. Reforming our international tax system provides us with an opportunity to increase global competitiveness while investing in infrastructure. We cannot wait until “next season.” After all, as any Indians fan knows, next season has been “just around the corner” for 67 years.

Co-Sign Sherrod's Letter

Please add your voice!

We are NOT the United States of Corporations. Let's remind them!

[artislife]

1. Done..nt

[RiverLover]

2. Thanks artislife!

[Igel]

3. Details matter.

Much of the complaint from corporations is that they pay taxes in the country in which the money is earned, but it's subject to a second tax when it's brought to the US. Most of the truly off-shored money owned by corporations is taxable in the US. It's just "owned" by off-shore shell corporations because then it's easier to keep the money earned off-shore housed off-shore. In some cases they avoid paying taxes on US-earned money, but the circumstances have to be just right for that. But if you can make better interest overseas,hey, put it overseas. (Then the interest, if it's owned by an off-shore shell corporation, isn't taxable.)

Most of the money that's kept overseas was, most of the large corporations will say, earned overseas. And taxed overseas. It can't be repatriated because it was never "expatriated". Details, details.

The corporations can access that money just fine. Brown's wrong. What they can't do is access it without taxation. They often find that the taxation "bonus" is greater than the net present value of the interest they have to pay to borrow money in the US. The reason for having some of the money kept off-shore is that US interest rates are ridiculously low so borrowing money domestically is ridiculously cheap. That is as much an incentive to keep a lot of the cash off-shore as the US tax structure. We want to control behavior but don't want to acknowledge all the reasons for that behavior. "We built that."

This doesn't matter much in terms of macroeconomics. Granted, bringing the money "home" would help inflate the money supply. At the same time, though, there's excess liquidity in the banking system. By borrowing money companies in effect cause the banks to create more money and that increases either the money supply or velocity, depending what decade you learned your economics in and your politics. The problem is that then the banks make money instead of the government. It's self-defeating for Brown to bring this into his op-ed piece, so he doesn't.

He'd also have to ponder one recent proposal--that the Fed not call back the trillions of dollars it pumped into the money supply to avoid deflation over the last 6 years, but instead pay bankers for not using that excess liquidity. In other words, the Fed keeps its assets (and maybe allows them to be paid off) in order to avoid destabilizing the mortgage security markets, but also keeps that liquidity from inflating the money supply (thus avoiding the spectre of inflation). The left-of-center (and Tea Party) objection is that this amounts to paying the banks interest on risk-free non-investments. Hard to think this is a good idea.

In many cases, a lot of the "money" is actually assets or kept "offshore" because the corporations also invest overseas. If they brought it all to the US, they'd have to borrow or re-deploy it overseas. Meaning they'd pay taxes on it for the privilege of earning low interest on the money, only to pay for that privilege when they needed it abroad. In other words, they'd get a haircut on their assets without any clear benefit to anybody but the government.

This is another conundrum. Take Africa. We hear calls for investment in Africa, become paranoid because China's investing in Africa. Yet the money that we expect to be invested in Africa is precisely corporate money.


Now, we could use "taxpayer" instead of "government," but for many that focus on DOD spending there's a clear difference. It's also worth pointing out that stock-holders are often US citizens and that even after itemizing deductions the effective tax rate produced by the capital gains tax of 30+% on their income is far higher than the effective rate a similar marginal income tax rate results in for those earning $50k or even $100k/year. Those not paying fairly high effective rates on capital gains turn out to have sustained large capital losses or not have huge investments and income. (Then again, we also confuse asset valuation and wealth with income, so it pays to be either quiet or cautious with terms.)


The idea of a universal minimum tax is great. Now all we have to do is either strong-arm smaller countries into accepting the US' proposal or override their sovereignty. I guess we could sermonize at them and insist that our morality is better than theirs, asking them to sacrifice their income for our good.

[hill2016]

4. also

He doesn't mention the reason why foreign companies can takeover US corporations is because of they are generally exposed to a territorial system (US corporations are uniquely taxed on both US and foreign earnings, the latter when repatriated). Hence foreign companies are exposed to a lower effective tax rate on non-US earnings creating an incentive to buy the US corporation.

First, the new system would allow corporations to pay taxes in the country in which they were earned. Second, we would eliminate tax havens by creating a county-by-county global minimum tax. This means that if a company is manufacturing products in a foreign nation for sale in a foreign country, they would pay nearly all of their tax to that foreign country and then be free to use their profits as they see fit. But if a company is moving profits to a tax haven and generates little economic activity in that nation, than it would owe the U.S. the minimum tax immediately. Third, the new system should include robust incentives to locate R&D jobs and manufacturing in the U.S.

I'm not sure what to make of the first point. Does that mean the US is moving to a territorial system and give up its claim on foreign earnings? I hardly doubt that...

What if a company manufactures item A in one country and sells it to country B? Does it owe US taxes? Why US specifically and not its country of domicile?

[hill2016]

5. I don't understand your point

about capital gains tax? Are you talking about the short-term capital gains tax? What's the relevance to the discussion?

[hill2016]

6. I'm not sure though

of the monetary impact of repatriating the overseas cash.

Assume the US corporations have $2 trillion of cash overseas.

Let's say they are forced to repatriate immediately at a tax rate of 20%.

That means $400 billion goes to the US Treasury and $1.6t goes onto onshore bank accounts.

Let's assume the $400b is spent rather than used to retire US Treasury debt. Probably has a very small impact on a $16t economy.

The more interesting thing is what to do with the $1.6t in on-shore cash. Given that corporations can already borrow at very low interest rate as you pointed out, most probably don't need that cash or can't find good investments where the return on equity (since these would be financed with equity) is greater than the cost of equity. So they should either have a special dividend or buy back equity (depending on which is more tax efficient for shareholders). If the company buy back shares there's no net transfer of cash to households. If there's a special dividend, the market value of the company drops by the cash dividend. Let's assume that investors are rational and the reason they have a specific allocation to a company is that they want to keep that allocation. So if there's a special dividend they would just turn around the buy back more of the company (stock -> cash + stock at reduced market value of the cash dividend -> stock). Net net there's no effect on household cash balance.

[RiverLover]

9. He's a senior member of the Finance Committee. The letter for the public is a simple outline easily

understood by many. You don't believe there are more details than presented here? Really?

And do you think maybe he only wants to do business with other countries who will agree with the global minimum tax? I think that's great. H*ll yes, strong arm them. Its better than having all our US Corps dodging taxes through them.

I loved it, all of it.

[MFrohike]

7. That's confused

Without the details, #1 and #2 seem directly opposed to each other. #3 looks like a giveaway to large companies, given Congress' predisposition to help the big boys at the expense of everyone else. The details of such a plan might make it more attractive, but it sounds like centrist "solution" that will help nobody but the people who don't need it. Again, I'm only critiquing the vague outline he's provided, as there are no details, but it's not a good beginning.

[RiverLover]

8. I left out the first line at the link - the "bipartisan" line. But you are still wrong, I believe.

The 1st doesn't oppose the second.

I love that this would eliminate tax haven countries.

[Pastiche423]

10. Signed