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Ways and Means Holds Full Committee Hearing on Tax Reform

US TAX CODE RANKED 31 OUT OF 35 IN COMPETITIVENESS AND CONGRESS WANTS TO FIX IT

House Ways and Means Committee Chairman Kevin Brady (R-TX) opened the May 2017 hearing on U.S. competitiveness by offering a startling statistic. The U.S. ranks almost at the bottom of our global competitors when it comes to having a business-friendly tax code. The nonpartisan Tax Foundation puts the U.S. rank at 31 out of 35 in its competitiveness index.

Why this assessment? The U.S. has not kept up with the global trend in lowering corporate tax rates. “The United States…has not reduced its federal corporate income tax rate from 35 percent since the early 1990s. As a result, its combined federal, state, and local corporate tax rate of 39 percent is significantly higher than the average rate of 25 percent among OECD nations. In addition, as most OECD nations have moved to a territorial tax system, the U.S. has continued to tax the worldwide profits of its domestic corporations,” according to the Tax Foundation report.

The OECD

The Organisation for Economic Co-operation and Development (OECD) is a government consortium made up of 35 member countries that promote free markets and develop economic and social policies around the globe. Most industrialized countries and U.S. trading partners are members.

Chairman McCarthy outlined three changes that should be adopted to boost the economy, create jobs, and increase U.S. competitiveness.

• Reduce the corporate tax rate.
• Reduce the cost of repatriation of corporate profits from overseas.
• Adopt a border adjusted tax system.

Most Retailers Say No

The Committee heard testimony from a number of witnesses, including CEOs from Target, Walmart, Archer Daniels Midland Company, and an economic advisory group, The Lindsey Group, and from economics professors at Reed College in Portland, Oregon. Not surprisingly, some CEOs of the big retailers expressed concern over the border adjustability proposal. Brian Cornell, Board Chairman and CEO of Target Corporation, told the lawmakers that the new border adjustment tax would undermine pro-growth principles in the House GOP Tax Reform Blueprint and would make American families pay more so “many multinational corporations can pay even less.” Cornell noted that more than 500 companies and associations “feel the same way.” Cornell offered the astonishing figure that, if the border adjusted cash flow tax is adopted, Target’s tax rate would “more than double, from 35 percent to 75 percent.”

Chairman Brady countered by noting that more than 160 countries border-adjust their taxes and contending that adopting it would increase economic growth. Juan Luciano, Chairman and CEO of Archer Daniels Midland Company praised the border adjusted tax, saying it would eliminate tax disparities on exports that arise due to differences between the U.S. income tax system and the border-adjusted VATs of OECD countries.

Border Adjustment Gets Support

Despite being the former Wal-Mart CEO, witness Bill Simon offered support for the border adjusted tax, stating that the benefit to U.S. manufacturing would outweigh the problems it could create. Simon urged that the new system would have to be implemented with a careful transition for retailers. He recommended “a long implementation period” and a ‘phase-in of the tax impact.”

Lawrence H. Lindsey of the Lindsey Group argued that border adjustment is “not complicated; it is far simpler than our current system.” He explained that, with border adjustment, companies do not track each individual product as it crosses borders in the production chain. Instead, they simply subtract the total value of goods exported from the total value of goods imported. So, a product that crosses a border many times simply gets netted out, he observed. Lindsey added that border adjustment will lead to a currency adjustment that will likely offset the additional tax.

The economists’ testimony from Kimberly A. Clausing, Thormund A. Miller, and Walter Mintz of Reed College painted a different picture. Their testimony first cited statistics showing that U.S. businesses are “incredibly successful”, with corporate profits at a higher share of GDP than they have been “at any time in history.” Also, U.S. companies are “dominant on the lists of the world’s most important companies,” they added. The three concluded that the risks of the House GOP Tax Plan “are simply too great.” It does not make sense to “risk the world trading system and the fate of many important industries,” by implementing such dramatic, untested changes, they concluded.

Democrats Warn of Price Increases

Committee Democrats expressed concern about the possible increase in consumer prices from a border adjusted tax. Ranking Minority Member Richard Neal (D-MA), in his opening statement, warned that there are “too many unknowns about the border adjustment tax.” Neal offered some numbers, claiming that …”retailers tell us the cost of products like food, clothing and medicine will go up for consumers by more than $1,700 – and gas prices will increase by 35 cents a gallon.” (No time period was given.)

The U.S. Should ‘Lead’

The goal of tax reform should not just be to make the U.S. more competitive, but should be to “vault America from dead last among our global competitors back into the lead pack…” Chairman Brady urged. Despite this call to action, no legislative language has been introduced in Congress so far, and the longer it takes for Congress to act, the more difficult it will be to enact sweeping corporate tax changes.
For prior coverage of the details of the border adjustment tax, see FD Insight’s May 8th posting.

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