The Center's work on 'Businesses' Issues


4 Reasons Why the House Has the Wrong Approach to Tax Extenders

November 20, 2014 at 4:09 pm

Congress is expected during the lame-duck session to address “tax extenders,” a set of tax provisions (mostly for corporations) that policymakers routinely extend for a year or two at a time.  While the Senate has pursued temporary extensions, the House has taken a far different approach that’s flawed on both policy and priorities grounds, as our updated paper explains.

The House has: made a number of extenders permanent; permanently expanded one of the biggest extenders, the research and experimentation credit; and permanently extended some temporary tax breaks that aren’t extenders — such as “bonus depreciation,” which lets businesses take larger upfront tax deductions for purchases like machinery.  (A temporary measure to help revive a weak economy, bonus depreciation is largely ineffective.)   But it hasn’t offset any of the considerable costs.

The House approach would:

  1. Undo a sizeable share of the savings from recent deficit-reduction legislation. At a combined ten-year cost of $312 billion, the nine extenders provisions that the House Ways and Means Committee has passed this year would give back two-fifths of the $770 billion in revenue raised by the 2012 “fiscal cliff” legislation.  (The full House has already approved seven of these, costing $235 billion.)  House Republicans also are pushing to make permanent an expanded version of bonus depreciation in an extenders package; adding this to the nine Ways and Means provisions pushes the total ten-year cost to $588 billion, or roughly three-quarters of the revenue raised in the “fiscal cliff” legislation.
  2. Constitute a fiscal double standard. Failure to pay for making the extenders permanent would contrast sharply with congressional demands to pay for other budget initiatives, from easing the sequestration budget cuts to extending emergency unemployment benefits for long-term unemployed workers.  While demanding that spending measures be paid for, the House is pushing for permanent, unfinanced tax cuts that would cost much more.
  3. Bias tax reform against reducing deficits. If policymakers make the extenders permanent before they enact tax reform, a tax reform plan wouldn’t have to offset their cost to be revenue neutral.  This would free up hundreds of billions of dollars in tax-related offsets over the decade that policymakers could then channel toward lowering the top tax rate.  The resulting package would lock in substantially larger deficits than under revenue-neutral tax reform that paid for the extenders or let them expire.
  4. Place corporate tax provisions ahead of other, more important tax provisions scheduled to expire. Most notably, key elements of the Earned Income Tax Credit and Child Tax Credit will die at the end of 2017 unless policymakers act, pushing more than 16 million people in low-income working families, including 8 million children into — or deeper into — poverty.  When policymakers consider which expiring tax provisions to continue, they should give top priority to making those key low-income provisions permanent.

Latest CRS Findings Refute Scare Talk About Medical Device Tax

November 6, 2014 at 12:51 pm

With congressional Republicans reportedly planning a renewed push to repeal the medical device tax, a Congressional Research Service report updated this week is especially notable.  It confirms what we’ve been saying for some time:  The 2.3-percent excise tax, which will raise $26 billion over the next decade to help pay for health reform, has only a very limited economic impact, contrary to the dire predictions of industry lobbyists.

  • “The effect on the price of health care,” CRS says, “will most likely be negligible because of the small size of the tax and small share of health care spending attributable to medical devices.” (page ii)
  • “The drop in U.S. output and jobs for medical device producers due to the tax is relatively small, probably no more than 0.2%.” (page 7)
  • “It is unlikely that there will be significant consequences for innovation and for small and mid-sized firms.” (page 8)
  • “The tax should have no effect on production location decisions, since both domestically manufactured and imported medical devices are subject to the excise tax.” (pages 18-19)

In short, the scare talk about the medical device tax doesn’t square with reality.  Moreover, proponents of repeal need to explain how they would replace the billions in lost revenue.

President Takes Important First Step Against Corporate “Inversions”

September 23, 2014 at 5:16 pm

In an important first step to stem “inversions,” in which a larger U.S. multinational merges with a smaller foreign firm to avoid U.S. taxes, the Treasury announced new rules that not only effectively remove one way that taxpayers subsidize such deals, but also tighten existing limits on them.  The President should (and likely will) look for further steps the Administration can take, and Congress should do its part to protect the corporate tax base from this brazen tax avoidance.

Here’s some background.  Corporations do not pay taxes on foreign earnings until they bring them back to the United States.  Many firms are looking for ways to access their foreign-held profits while avoiding U.S. taxes — the same taxes that domestic firms pay on their profits.  A corporate inversion is one way to achieve this goal, which is why firms such as Medtronic, AbbVie, Pfizer, and Mylan have all sought or announced plans to invert.

The Treasury’s new rules aim to discourage firms from pursuing such tax avoidance inversions.  One new rule prevents inverted firms from using so-called “hopscotch” loans to access a foreign subsidiary’s prior earnings and avoid U.S. tax.  These loans, which a subsidiary in a foreign tax haven makes to the new foreign parent (thereby “hopscotching” over the former, U.S.-based parent in order to avoid U.S. tax), will now count as U.S. property and thus be taxable.

The Treasury is also closing some loopholes in existing anti-inversion regulations, such as tightening the rule that a U.S. firm combining with a foreign firm continue to be taxed as a U.S. firm if it owns 80 percent or more of the combined company.  The Treasury rule aims to ensure that this 80 percent threshold is a real one.

The President and several key members of Congress have called for legislation to lower this threshold even further.  They want to set the threshold at 50 percent, meaning that a U.S. firm could not invert without losing control of the new firm.  That would act as a strong deterrent against inversions.

The President and Congress should also pursue how to crack down on “earnings stripping,” which allows companies to use debt to siphon profits out of the United States.  A further option would be to require companies that invert to pay the taxes they owe before they “leave” the country.  The President and Congress should take these next steps to combat the inversion epidemic.

Debating Corporate “Inversions”

September 19, 2014 at 3:32 pm

At a Heritage Foundation panel discussion this week, CBPP Senior Tax Policy Analyst Chye-Ching Huang debunked myths surrounding the recent wave of corporate “inversions,” in which U.S.-based firms move their headquarters overseas for tax purposes, and explained why policymakers should take strong action against them, explaining:

People think that there is a simple story that is driving inversions . . . that there are companies that are changing their tax headquarters to escape the highest statutory rate in the OECD [Organisation for Economic Co-operation and Development].  But that simple story is not what is happening. . . . The problem is really about U.S. multinationals and other multinationals gaming the tax system in the U.S. and all throughout the OECD so that they can claim that all of their profits are in tax havens.

Other panelists included CNBC Senior Economics Contributor Larry Kudlow, Heritage Chief Economist Stephen Moore, and Walter J. Gavin, Retired Vice Chairman of Emerson Electric.

As we’ve explained (see here and here for examples), the effective tax rate that U.S. multinationals face on their worldwide income is well below the 35 percent top U.S. statutory rate.  A big reason why is that multinationals report vast amounts of their income as coming from tax havens where they pay little or no tax.  Adopting a foreign headquarters could make it easier for multinationals to claim that their profits are made offshore and to use tax havens to avoid taxes anywhere.

House Republicans’ Wrong-Headed Approach to Tax Extenders

September 17, 2014 at 1:00 pm

House Republicans are putting before the House this week a campaign-oriented bill of wide-ranging measures that have previously passed the House, including repealing portions of the Affordable Care Act and scaling back Dodd-Frank regulations.  The bill, which won’t advance beyond the House due to obvious Senate and White House opposition, also includes business tax provisions that lawmakers will likely consider again during Congress’ post-election lame duck session this fall.  For that reason alone, the legislation warrants some attention.

The House bill would make permanent certain “tax extenders” — so named because Congress routinely extends them for a year or two at a time — as well as bonus depreciation, which lets businesses take larger upfront tax deductions for certain purchases, such as machinery and equipment, and that historically has been a temporary measure to help revive a weak economy.  Congress should reject the House approach to these provisions because it is not fiscally responsible, is poorly designed from an economic standpoint, and is antithetical to tax reform.  Moreover, it reflects seriously misplaced priorities, putting the permanent extension of these business provisions ahead of more pressing provisions for hard-working families.

  • Its $500 billion price tag is fiscally irresponsible.  Policymakers have enacted significant deficit-reduction measures since 2010, with the vast majority coming from spending cuts.  The one revenue contribution stems from the 2012 “fiscal cliff” bill — i.e., the American Taxpayer Relief Act — that raised $770 billion in revenue from high-income taxpayers (from 2015 to 2024).  The tax extenders and bonus depreciation provisions in the House bill would reduce revenue by $500 billion over the decade, effectively giving back two-thirds of the revenue contribution to deficit reduction (see chart).  (The total cost of the House bill is about $575 billion, because of other revenue-losing provisions.)

  • It’s poorly designed from an economic standpoint because it makes bonus depreciation permanent.  Making bonus depreciation permanent accounts for more than half of the $500 billion cost of the business tax provisions.  But bonus depreciation was specifically designed not to be permanent because its temporary nature is what drives its (albeit limited) effectiveness during recessions.  Its modest economic boost comes entirely from inducing firms to accelerate some of their purchases into the period when the tax break is in effect and the economy is weak.  Making it permanent would negate this modest incentive effect.  That’s why the Bush Administration and Congress allowed it to expire after the 2001 recession ended and why this Congress should let it expire now.
  • It moves away from tax reform.  The fundamental nature of tax reform is to “broaden the base” by scaling back tax subsidies and to use the freed-up funds to lower tax rates, reduce budget deficits, or both.  For example, House Ways and Means Chairman Dave Camp (R-MI) earlier this year advanced a comprehensive plan that eliminated tax subsidies for certain business investments, including the repeal of bonus depreciation.  These changes were central to his base-broadening provisions.  But the package that House Republicans are now bringing before the House goes in the opposite direction.  Its provision to make bonus depreciation permanent narrows the tax base and, thereby, moves away from tax reform.

If, during the lame duck session, policymakers consider making any tax extenders permanent, they should focus first on making permanent important provisions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) that are due to expire at the end of 2017.  Failure to make the EITC and CTC provisions permanent would have a significant impact on low- and moderate-income families, pushing 17 million people (including 8 million children) into — or deeper into — poverty.