More About Chye-Ching Huang

Chye-Ching Huang

Chye-Ching Huang is a tax policy analyst with the Center’s Federal Fiscal Policy Team, where she focuses on the fiscal and economic effects of federal tax policy. You can follow her on Twitter @dashching.

Full bio and recent public appearances | Research archive at CBPP.org


Timing Gimmick Alert on Corporate Tax Reform

March 3, 2015 at 3:38 pm

As we’ve explained, timing gimmicks pose a threat to fiscally responsible corporate tax reform.  A recent comment by Dr. Laura Tyson, a University of California, Berkeley professor and an adviser to a coalition of American businesses that favor comprehensive corporate tax reform, illustrates the point.  Testifying before the Senate Finance Committee, she responded to a question by noting that one possible use of one-time revenues from a tax on multinationals’ current stock of overseas profits could be to “pay for” a permanent cut in corporate tax rates.  That’s a way for corporate tax reform to increase the deficit over the long term.

Multinationals have about $2 trillion in profits stashed offshore to avoid U.S. tax; they don’t owe tax on them until they declare them “repatriated” to the United States.  Any enacted corporate tax reform will likely include a mandatory, one-time transition tax on those existing foreign profits to wipe the slate of those deferred tax liabilities.  (Future overseas profits would be treated differently.)

Such a transition tax could raise significant revenues.  The President’s proposed transition tax of 14 percent, for example, would raise $268 billion over 2016-2025.  Companies would have six years to pay the tax, but since the tax wouldn’t apply to future overseas profits, it wouldn’t raise any revenues after the sixth year.

That’s the problem with suggestions that revenues from a transition tax could be used to help “finance” a lower corporate rate.  In reality, those one-off revenues can’t pay for any permanent tax cuts because the revenues disappear after six years.  The result would be a reform package that’s revenue neutral within the ten-year budget window but expands deficits by large and growing amounts in future decades.

Indeed, if the $268 billion from the President’s transition tax went to finance a corporate rate cut so that the combined policy would be revenue-neutral in the first decade, such a policy combination would add more than $300 billion to deficits in the second decade (see graph).

To avoid a long-run increase in deficits, the President’s budget devotes the one-time revenues from the transition tax to one-time infrastructure investments.

At a time when critical investments face continued cuts in the name of deficit reduction, it would be inequitable for the corporate sector not only to avoid contributing to deficit reduction but to receive permanent, deficit-increasing tax cuts.

The Risks of Dynamic Scoring

February 26, 2015 at 11:06 am

In a guest TaxVox blog post for the Tax Policy Center’s series on “dynamic scoring,” I discuss some of the risks of a new House rule requiring dynamic scoring for official cost estimates of tax reform and other major legislation.  Under dynamic scoring, those estimates would incorporate estimates of how legislation would affect the size of the U. S. economy and, in turn, federal revenues and spending.

Dynamic estimates vary widely depending on the models and assumptions used.  I conclude that to make sense of those scores, policymakers will need more information about the models and assumptions than the House rule requires:

The House rule allows the House to use any increase in revenue from highly uncertain estimates of macroeconomic growth to pay for other policies. Policymakers will also be tempted to use a favorable dynamic estimate as proof that a policy is good for the economy and therefore should be enacted.  But the uncertainty and gaps in the models may mean that such a simple conclusion isn’t appropriate. Lawmakers will need more information than the House rule requires to assess the reliability of the estimate and to understand a bill’s possible economic effects.

Paul-Boxer Repatriation Tax Holiday May Hide True Long-Term Costs

February 5, 2015 at 12:44 pm

Explaining why the “repatriation tax holiday” proposal from Senators Rand Paul (R-KY) and Barbara Boxer (D-CA) actually would lose revenues (so it couldn’t pay for highway construction as they claim), we cited a 2014 Joint Committee on Taxation (JCT) analysis showing that a new holiday would expand deficits.  The Paul-Boxer holiday is designed to push more of its revenue losses outside the ten-year budget window, thereby hiding the true long-term cost.  But, like any repatriation holiday, it would bleed revenues for decades.

A new repatriation holiday (following the one that policymakers enacted in 2004) would allow U.S.-based multinational corporations to bring profits they hold overseas back to the United States at a temporary, vastly reduced tax rate.  It would boost revenues during the holiday period, as companies rushed to take advantage of the temporary low rate.  But it would lose revenues thereafter.  As JCT explained, the biggest reason is that a second holiday would encourage companies to shift more profits and investments overseas in anticipation of more tax holidays, thus avoiding taxes in the meantime.

JCT’s analysis of a two-year holiday featuring a 5.25 percent rate on overseas profits clearly shows how it would lose revenues after the holiday years (see graph).

The Paul-Boxer plan gives firms five years to take advantage of its holiday rate of 6.5 percent, so its costs likely wouldn’t begin showing up until the sixth year.  As a result, over the initial decade it could be less expensive or even appear to be revenue-neutral or raise money, but it would still cost money over the long run.  By delaying the federal costs, spreading out the holiday could function as a timing gimmick.  Policymakers who pretend to use the holiday to “pay for” highways or anything else would only add to long-term deficits.

The Paul-Boxer plan shouldn’t be confused with the President’s proposed mandatory transition tax on offshore profits to pay for infrastructure.  Unlike a repatriation holiday, a well-designed transition tax would raise real revenues and is a sound way to deal with multinationals’ vast pile of offshore profits.

Previewing the Obama Budget’s Tax Proposals

February 2, 2015 at 9:34 am

Below are some key facts and resources about some tax proposals we expect the President’s budget to include.  Stay tuned for more analysis once the budget is released this morning.

Reforming Capital Gains Taxes

The tax code strongly favors income from capital gains — increases in the value of assets, such as stocks — over income from wages and salaries.  These preferences are both economically inefficient and highly regressive.  The President’s budget will include recently released proposals to address these problems by: 1) applying the capital gains tax to large, “unrealized” capital gains that wealthy individuals leave behind when they die; and 2) narrowing the differential between the top capital gains rate and the top tax rates on earned income by returning the capital gains rate to its level under President Reagan.

For more, see:

Strengthening Tax Credits for Working Families

As in last year’s budget, the President will propose extending the pro-work and anti-poverty effects of the Earned Income Tax Credit (EITC) to low-income workers not raising minor children, the lone group that the federal tax system taxes into poverty.

He will also call for permanently extending key provisions of the EITC and the Child Tax Credit slated to expire at the end of 2017; more than 16 million people (including nearly 8 million children) will fall into — or deeper into — poverty if they expire.

In a rare sign of possible bipartisan agreement, House Ways and Means Chairman Paul Ryan last year offered a proposal to expand the EITC for childless workers that’s almost identical to the Obama proposal.

For more see:

Giving the IRS More Adequate Funding

Significant cuts to IRS funding in recent years have compromised taxpayer service and weakened enforcement of the nation’s tax laws.  As in last year’s budget, we expect the President’s budget to restore more adequate funding for this essential agency.

For more, see:

Reforming Corporate Taxes

The tax code tax encourages multinational corporations to shift investments and U.S.-earned profits to foreign tax havens.  The President’s budget is expected to reiterate his previous calls for corporate tax reform that reduces those incentives while broadening the tax base, as well as including new proposals to reform the international tax system.

For more, see:

Raising Tobacco Taxes to Invest in Early Childhood Education

The President has called for expanding preschool education.  His last budget proposed to finance it by raising the federal excise tax on tobacco products.  Tobacco taxes are a proven strategy to reduce smoking, particularly among teenagers and low-income people, and reducing smoking rates would generate substantial health gains.

For more, see:

Obama’s Transition Tax on Offshore Profits Is Sound, But a Higher Rate Would Bring More Revenue Without Adverse Economic Effects

February 1, 2015 at 4:05 pm

President Obama’s budget will propose a 14 percent tax on multinational corporations’ existing offshore profits and invest the $238 billion in revenues in infrastructure, Bloomberg reports.   That’s a sound way to address corporations’ huge stock of foreign profits, much of it in low-tax jurisdictions like Bermuda and Luxembourg, in transitioning to a reformed international tax system. But setting the rate above 14 percent would produce more revenue without affecting firms’ decisions about where and how to invest.

Multinationals don’t face the 35 percent U.S. corporate tax until they declare those profits “repatriated” to the United States. That’s why many multinationals use accounting maneuvers to report as much of their profits offshore as possible. Multinationals have about $2 trillion in “foreign” profits, much of it actually earned in the United States, stashed offshore to avoid U.S. tax.

Any enacted corporate tax reform will likely include a one-time transition tax on existing foreign profits like the Obama proposal to clean the slate of existing tax liabilities.  Such a tax would be mandatory: multinationals would have to pay U.S. taxes on their existing foreign profits whether they repatriate them or not.  Future overseas profits would be treated differently.

The President proposes to use the transition-tax revenues for infrastructure. That’s sound for two reasons.

First, it helps ensure corporate tax reform doesn’t increase deficits. Using the one-time revenues for infrastructure investments means policymakers couldn’t devote them to permanent corporate rate cuts, which would boost long-run deficits. That reflects the President’s standard that corporate reform shouldn’t increase long-run deficits.

While we would prefer that corporate tax reform reduce deficits, we agree that any proposal should meet revenue standards over the long run as well as the ten-year budget window. Otherwise, policymakers could use timing gimmicks to craft a reform package that’s revenue neutral over the first ten years but swells deficits and debt after that.

Second, it’s a sound way to finance infrastructure investment. The revenues generated by a one-time transition tax are real. In stark contrast, proposals to pay for infrastructure spending with a “repatriation tax holiday” for offshore profits, such as Senators Boxer and Paul proposed last week, are a charade. As the Joint Tax Committee has shown, a repatriation tax holiday loses substantial revenue and hence couldn’t “pay for” highway construction or anything else.

While the President’s approach is sound, setting the 14 percent rate somewhat higher would raise more revenue without adverse incentive effects. As a leading expert on international taxation, University of Southern California law professor and former Joint Tax Committee staff director Edward Kleinbard, told Congress recently, taxing past profits held offshore wouldn’t distort firms’ decisions about where and how to invest:

In ordinary situations all taxes incur “deadweight loss” — the cost to the economy of the transaction [that isn’t] undertaken because its returns after tax are too low, even though its pre-tax returns would have cleared the hurdle. But the $2 trillion in offshore permanently reinvested earnings occupies a different place, because taxing those earnings as part of the transition to an entirely new international tax system will have no effect on future behavior, since the earnings hoard relates entirely to the past. Thus demands for a very low transition tax rate on the repatriation of existing foreign earnings in the context of tax reform are precisely backwards as an economic matter.

The President’s budget also will include a permanent 19 percent minimum tax rate on U.S. multinationals’ future foreign earnings as part of a reformed international tax system, Bloomberg reports. We’ll analyze that proposal when we see more details. It’s crucial that international tax reform as a whole, including any minimum tax, shrink the incentives for corporations to shift profits and investment offshore.