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A First Look at the Baucus Draft on International Corporate Tax Reform

Yesterday’s staff discussion draft on international corporate tax reform from Senate Finance Committee Chair Max Baucus recognizes the importance of tax reform’s budgetary impact over the long term, not just in the first decade.  It also recognizes that the tax code gives multinational corporations an incentive to move profits and investment offshore, and it narrows or closes several ill-conceived and heavily exploited tax loopholes.  It is distinctly superior to various ideas that various corporate lobbying coalitions are circulating and to a draft proposal that House Ways and Means Committee chair Dave Camp circulated earlier this year.

At the same time, while the draft takes important steps to address the tilt in favor of foreign profits, it leaves some foreign profits on active business in a more favorable tax position than domestic investments and profits.

First, let’s consider the fiscal impact.  The Baucus draft states that it is “intended to be revenue-neutral in the long-term” (emphasis added).

On the one hand, the target of revenue neutrality is disappointing.  If international corporate tax reform is revenue neutral over the long term, any savings from closing loopholes that encourage multinationals to shift profits and investments offshore wouldn’t contribute to long-term deficit reduction.  Multinationals would make no contribution to that, even as others are asked (sooner or later) to sacrifice.

On the other hand, the draft lays down an important standard:  policymakers must measure tax reform’s fiscal effects over the long term, not just over the next ten years.  The draft calls, for example, for a one-time, 20 percent tax rate on corporate profits now held offshore (in part to avoid U.S. taxes), but it doesn’t use these one-time revenues to construct a tax plan that is revenue-neutral for the initial ten years but loses revenues over time.  The draft commendably avoids timing shifts and temporary revenues that can make a plan look fiscally responsible (when only the first ten years are considered) when, in fact, a plan might be anything but responsible over the longer run.

In addition, the draft wisely doesn’t adopt a cartoon version of “territorial taxation,” in which multinationals would pay little or no taxes on overseas profits.  It includes some important provisions to address some of the most egregious loopholes and to reduce incentives for corporations to shift manufacturing offshore.  Importantly, it proposes an effective tax rate floor — that is, a minimum tax — on U.S. multinationals that currently pursue the most aggressive tax avoidance strategies.  That will help address the current lopsided tilt toward foreign investments and profits.

Still, the draft does not fully correct for that tilt.  That’s because the draft still allows some foreign profits to be taxed at a discounted tax rate compared to domestic profits.  Some foreign profits would be taxed at either 60 percent or 80 percent of the U.S. corporate tax rate — a proposition that surely would prove difficult for any average U.S. taxpayer to understand.

Chuck Marr
Vice President for Federal Tax Policy