Here is how Congress can pass tax reform

By Duncan McCampbell

As it stands today I don’t think the GOP has a very good chance of fixing what, in my mind, is the most broken part of the U.S. Tax Code: our self-defeating, highest-in-the-developed-world corporate tax rate. No other major economy--and certainly not China--burdens its big companies like we do. It’s the reason why American multi-national corporations won’t bring their foreign earnings back to the U.S. to invest in their home country. They’ve stashed over $1 TRILLION offshore, out of the clutches of the IRS. It’s why a growing number of large U.S. companies engage in “reverse mergers,” to actually change their corporate citizenship. It is the reason hundreds of American companies maintain big, fake offices full of highly paid people in low tax countries like Switzerland.  These people do nothing but fill the bistros of Zurich and give their companies the appearances necessary to substantially lower the tax they pay on U.S. earnings and assets. Yes, everyone agrees that the U.S. corporate tax code needs to change.  But can Congress pull it off?

People have waited a long time for this opportunity.  As silly and self-defeating as the conditions have become, the business community and their predominantly (but not exclusively) Republican friends in government weren’t going to propose any meaningful tax reforms while a Democrat occupied the White House. That is, in their minds, a bit akin to handing a loaded Glock to a five year-old.  But when Trump got in folks became a bit giddy at the tax reform possibilities.  Yes, giddy, until the president started doing and saying some certifiably goofy things impacting multi-national businesses.  Things like withdrawing from the Trans-Pacific Partnership, perhaps our last opportunity to put an economic ring-fence around China. Then there was talk of blowing up NAFTA.  Then there was the actual withdrawal from the Paris Climate Agreement which, if you will recall, was not at all appreciated by some of the leading lights in the American corporate community. Now the Iran nuclear deal hangs in the balance after several U.S. multi-nationals did some very lucrative deals with Iran.  Trump loves a deal, but apparently only the ones he negotiates.

Adding to the uncertainty is the politics of tax reform. Americans are rightly cynical about tax reform. They know that Washington is an ant hill teeming with cash-wielding corporate lobbyists who don’t give a hoot about them. When health care was the issue, the GOP had all the partisan red meat it needed: a hated law that was even named after Barack HUSSEIN Obama. Tax reform presents no such bogeyman to awaken the base.  Indeed, if corporate tax reform is not packaged properly (and, mind you, the GOP has had some serious packaging challenges of late) it could be fairly characterized as mere corporate welfare. 

Imagine a corporate tax reform plan cooked up—again--by the GOP behind closed doors and clumsily, inconsistently touted by a president whose inattention to detail and refusal to share his own tax returns gives him zero tax credibility. Yep, corporate welfare. That’s certainly what I’d call it if I were Nancy Pelosi or Chuck Schumer and my phone wasn’t ringing. And while I waited for that call from Paul Ryan or Mitch McConnell, I’d thank the president for his leadership and ask him whether he would personally benefit from the changes to the tax law which he's proposing.  Still waiting, I would patiently listen to the president tell us (as you KNOW he will) that the proposed law would actually hurt his business interests, whereupon I’d ask him to prove it by releasing his tax returns. You get it. The GOP not only needs Democratic votes to pass tax reform in the Senate. They REALLY need to keep the Democrats from going to obvious and uncomfortable places with the tax discussion.

Nancy Pelosi and Chuck Schumer aren’t going to release their caucuses to support any plan to lower corporate tax rates without a very compelling bargain. I could see Democratic votes behind a plan to bring the corporate rate down to sensible levels IF it produces benefits that Democrats are eager to champion. And here is what it is: infrastructure investment.

Note to File: Corporate offshore earnings repatriation has been attempted before on a one-off basis. The last time Congress enacted a partial tax amnesty making it attractive for corporations to repatriate foreign earnings, the companies brought the money home, paid their nominal tax and then cynically used the funds to raise executive compensation and do share buy-backs to bolster their share prices. The very rich got even richer.  No jobs were created. That cannot happen again.

The right plan will incent companies to repatriate their foreign earnings--now sitting uselessly offshore—for a substantial discount on their tax rate. The repatriated funds must be used by the companies for well-defined things that will expand domestic business and create jobs. The money raised from taxing the repatriated funds (and it will be A LOT if the law is properly drafted) will be used to finally address our crumbling public infrastructure in a massive public/private works initiative. High paying construction jobs will be created all across the country. The new highways, bridges, tunnels, subways, schools, hospitals, waterways and airports will be built by American workers, operating American made construction equipment, using American steel.  The political and economic benefits are obvious.

In summary, I believe corporate tax reform will happen if:

• The reform proposals move through Congress in regular order (hearings, amendments, Democratic inputs, etc.);
• The reform package, which permanently lowers the corporate tax rate and incents companies to bring offshore earnings home, also has strong provisions for what companies can and cannot do with the money they bring home. It must be used to grow the company's domestic business and create jobs.
• The tax revenues collected from repatriated corporate earnings will be dedicated solely for infrastructure investment.

DM