Directions for International Tax Reform, Testimony before the U.S. Senate Committee on Finance Hearing on International Tax Reform

Abstract

Testimony before the U.S. Senate Committee on Finance Hearing on International Tax Reform, October 3, 2017. Objectives for Tax Reform: Tax reform should maintain or enhance our tax system’s current level of progressivity in distributing tax burdens and benefits. The most significant social welfare fact today is that the income of middle and lower income workers has stagnated in recent decades and a disproportionate share of income growth has accrued to those with highest incomes — the top 1%. While we have recovered from the recession and middle and lower income workers have made some gains, the disparity between high-income and middle- and lower-income has grown substantially and income mobility is more constrained than for prior generations. The taxation of cross-border income of U.S. MNCs should be analyzed under the same fairness standards that apply to any other income. In particular, as I discuss later in this testimony, a reduced “holiday” tax rate on U.S. MNCs’ pre-effective date offshore earnings will overwhelmingly benefit high-income Americans (and foreigners) and is not justified on any policy ground. Its sole purpose is to provide a one-time source of revenue that disguises the future revenue loss from shifting to a weak territorial system. Tax reform should be revenue neutral or increase net revenues. The central importance of our tax system to national competitiveness and growth is to fund public goods, such as education, basic research, infrastructure, healthcare and income security transfers, and national defense. These government services and capital expenditures support a high standard of living, income security, and physical security for all Americans. It is the job of the tax system to raise the necessary revenue to fund needed public expenditure and not add trillions to the national debt as proposed in the Senate Budget proposal and the GOP Tax Reform Plan. Objectives for International Tax Reform: International tax reform should maintain or increase, not reduce, the aggregate tax on U.S. MNCs’ foreign income. There is no policy justification to advantage international business income of multinational corporations (MNCs) beyond allowing a credit for foreign income taxes. Moreover, evidence does not support claims that U.S. MNCs are overtaxed or are non-competitive as a consequence of U.S. tax rules. The U.S. Treasury Department found that the average tax paid by U.S. companies from 2007–2011 on their book earnings plus foreign dividends was 22%. The most recent publicly available Statistics of Income data for 2012 shows that foreign subsidiaries of U.S. MNCs in the aggregate paid an average foreign tax rate of 12%. Foreign income should be taxed currently or, if that is not politically feasible, under a per country minimum tax regime that is effective in discouraging tax avoidance through transfer pricing and related techniques that shift and indirectly erode the U.S. tax base. International tax reform should assure that the tax rules for foreign multinational companies on U.S. business activity does not provide them an advantage in relation to U.S. companies. Tax reform should undertake a fundamental review of U.S. source taxation of cross-border activity having a U.S. destination including remote digital sales into the United States. In addition, tax reform should strengthen U.S. corporate residence and earnings stripping rules. Taxation of international portfolio income should be fundamentally re-examined. Under current rules, there are U.S. tax advantages for portfolio investment by U.S. investors in foreign stock over domestic stock. Similarly, foreign pension funds that benefit principally foreign workers receive exemptions and reliefs from U.S. tax that are not reciprocated by foreign countries on U.S. pension funds benefitting U.S. workers. A fundamental tax reform effort should re-examine from scratch the U.S. rules for taxing cross-border portfolio income, however, the treatment of portfolio income is a subject for development on another occasion.