Changes to the tax code always create winners and losers. An ambitious plan to revise the system for taxing multinational corporations, released on Tuesday by the Senate Finance Committee chairman, Max Baucus, would hit technology companies and large pharmaceutical companies especially hard. Companies like Pfizer, Apple, Hewlett-Packard and Microsoft have become masters at reducing their tax liability in the United States by shifting income overseas.
These companies often hoard cash in offshore subsidiaries, and in the past they have successfully lobbied for a tax holiday to repatriate cash at lower tax rates. The Baucus proposal would, among many changes, end this practice of tax deferral and impose a minimum tax of about 20 percent on overseas profits â€" whether those profits are repatriated to the United States or not.
The plan is designed to be revenue neutral in the long term, but that doesn’t mean that it is distributionally neutral. The more games that businesses have played to shift income overseas, the more they have to lose under the Baucus plan. The winners are everyone else. In a revenue neutral plan, technology and pharmaceutical companies’ losses are someone else’s gain.
Support for the plan should come from companies who have clean hands and pay a lot of tax under the current system. The Baucus plan is designed to slot into the broader tax overhaul effort from both tax-writing committees that would lower the corporate rate to 28 percent or lower, from 35 percent.
Lowering the corporate tax rate may not be possible without these fixes to the international system that prevent erosion of the tax base. Goldman Sachs, JPMorgan Chase and other financial services firms that tend to have high effective tax rates would benefit from the Baucus plan and the broader effort to lower rates.
The Baucus plan is an important step toward legislation that deserves attention. Unlike a plan proposed by the House Ways and Means chairman, Dave Camp, two years ago, the Baucus plan would retain efforts to tax American-based companies on a worldwide basis, rather than shift to a “territorial†system that would exempt most foreign profits from United States tax. How we resolve this fundamental difference between the two plans will set the direction of international tax policy for a long time.
Wall Street and others who stand to benefit from a more sensible international tax system will have to provide support to the Baucus effort if it is to gain any momentum. And yet there is little incentive for anyone to stick his neck out right now. No one expects tax legislation to get a vote anytime soon, as both parties are busy preparing for coming budget negotiations.
Victor Fleischer is a professor of law at the University of San Diego, where he teaches classes on corporate tax, tax policy, and venture capital and serves as the director of research for the Graduate Tax Program. His research focuses on how tax affects the structuring of venture capital, private equity, and corporate transactions. Twitter: @vicfleischer
