Although Donald Trump claims that his forthcoming tax plan will be “phenomenal,” he is in truth not likely to propose something really new.
Before the election, Trump put forth a broad tax plan and then a narrower plan. But even the narrower plan created a budget deficit of roughly $3 trillion to $4 trillion over 10 years, according to the dynamic scoring of the independent researcher Tax Foundation. That steep increase in the national debt would present major challenges, given rising interest rates and much larger budget pressures from entitlement programs.
Soon after the election, President Trump lambasted the border adjustment tax ( BAT ) plan of the House Republicans. Then he began to be more favorable to the BAT because he believed — wrongly — that it would impose a large tariff on Mexican imports to pay for the wall. In fact, the BAT would effectively impose a tax on all imports, which would probably be absorbed by importing companies and their customers.
So there are three main questions about what type of tax plan Trump could propose.
Read the rest at marketwatch.com…
Donald Trump’s campaign to become the next president of the U.S. has thrown up two far-reaching proposals to reform the taxation of corporate profits: reducing the tax rate on domestic profits to 15 per cent, and taxing foreign profits of U.S. corporations at 15 per cent each year.
The first proposal, a budget buster, is a poorly designed way to tax business; the second proposal, a revenue raiser, is a reasonable way to fix the current system for taxing foreign profits.
The current tax rate of 35 per cent is almost the highest in the world, so it should be lowered to make the U.S. a more competitive location for corporate facilities and jobs.
Read the rest at brookings.edu…
Senator Hatch, chairman of the Senate Finance Committee, is focusing on an important aspect of the agenda for corporate tax reform—allowing U.S. corporations to receive a deduction for dividends paid to their shareholders. That deduction would eliminate double taxation of corporate profits distributed as dividends; instead, these profits would be taxed only to shareholders, not at both the shareholder and corporate levels.
Although Senator Hatch has not disclosed the details of his proposal, a corporate deduction for dividends paid has several advantages. But such a proposal would raise financial and political challenges that would have to be addressed.
Read the rest at brookings.edu…
As voters in Idaho, Michigan, Mississippi and Hawaii head to the polls on Tuesday for the GOP primary, they should take a closer look at the frontrunner’s tax plan and what that could mean for their wallets.
Donald Trump’s plan would sharply reduce the top tax rate on individual income from 39.6% to 25% and broadly reduce rates for individuals with lower incomes. His plan would also lower the tax rate on corporate income from 35% to 15%, and apply this 15% to other “business income.”
While his plan limits certain tax preferences and deductions, it does not include any reductions in federal spending. As a result, the Trump plan increases the federal deficit over the next decade by $10 trillion or $12 trillion, according to several estimates that do not include macroeconomic changes in GDP, investment and employment. Of course, these so-called “static” estimates do not reflect the potential tax revenue from the economic growth resulting from lower tax rates. However, even under “dynamic” scoring, which takes into account a broad range of macroeconomic effects of tax proposals, his tax cuts would still expand the federal deficit over the next decade by $10 trillion — on top of the $10 trillion increase in the federal deficit already projected under current law.
Let’s consider two prominent analyses of the Trump tax plan — one by the Tax Foundation and the other by the Tax Policy Center. Despite their different methodologies, they both estimate that the Trump plan would cut tax revenues by over $10 trillion in the next decade.
Read the rest at fortune.com…
The corporate aspects of the tax plan recently announced by presidential candidate Jeb Bush are aimed at achieving the worthwhile goals of economic growth and job creation. However, these goals are likely be undermined by the plan’s treatment of foreign profits of U.S. multinationals and unrealistic projections of tax revenues from rate cuts.
Almost everyone would agree that the current U.S. system for taxing foreign profits of U.S. multinationals is seriously flawed. In theory, such profits are taxed by the U.S. at its standard corporate tax rate of 35 percent — one of the highest in the industrialized world. In fact, such profits are NOT subject to any U.S. corporate tax as long as they are held overseas. As a result, such profits of U.S. multinationals are effectively “trapped” overseas – they are generally not repatriated to build US plants, buy US start-ups or pay dividends to their American shareholders.
The Plan on taxing PAST foreign profits of U.S. multinational is sensible — a one-time tax of 8.75 percent paid over a period of years. That could raise close to $180 billion in revenues. Since U.S. multinationals reasonably relied on the existing U.S. tax rules for foreign profits by holding them abroad, these corporations should be taxed at a modest rate on such past profits.
In the future, however, Jeb’s plan calls for a pure territorial system — foreign profits will be taxed only in the country where they are “earned.” This plan, if adopted, would strongly encourage U.S. multinationals to transfer their intellectual property (patents, copyrights and trademarks) — which can be moved easily at minimal cost — to tax havens, like the Bahamas, where they pay little or no corporate taxes.
Read the rest at realclearmarkets.com…
The debate over Pfizer’s bid to buy U.K. drugmaker AstraZeneca is intensifying. Last week, AstraZeneca rejected Pfizer’s offer of $106 billion, even though it was about 7% higher than its previous bid.
As negotiations escalate, it’s worth taking a close look at Pfizer’s proposed merger into AstraZeneca – with its tremendous implications for U.S. tax collections and tax policies. Pfizer’s determination underscores how driven U.S. multinational corporations are to shift their domicile outside the U.S. Why? Unless they keep foreign profits abroad, the U.S. subjects them to a corporate tax of 35%.
As a result, more than $2 trillion in foreign profits held by multinationals are “locked out” of the U.S. These funds could otherwise be spent making critical investments in the U.S. economy, such as building manufacturing facilities, buying U.S. companies, or even paying dividends to shareholders. For instance, Apple recently borrowed $17 billion to pay dividends, despite holding more than $130 billion abroad.
Thus, the current tax rules reduce investments in the American economy and distort business decisions of American executives. Moreover, although the U.S. corporate tax rate is almost the highest in the world, the U.S. Treasury receives relatively little revenue from taxes on foreign profits from multinationals.
Read the rest at fortune.com…
Tax experts from around the world gathered two weeks ago in Washington DC to push forward a Euro-led project for the prevention of BEPS — base erosion and profit shifting. This project is aimed at getting multinational companies to locate facilities and jobs in real countries, instead of post office boxes in tax havens.
The corporate tax rates in Europe are already 10% to 15% lower than the 35% rate in the U.S. If Europe moves forward with BEPS, that will put more pressure on US large companies to move people and plants abroad — unless Congress substantially reduces the U.S. corporate tax rate.
While almost everyone wants to reduce the U.S. corporate tax from 35% to 25%, almost no industry is willing to give up its current tax preferences to achieve this rate reduction on a revenue neutral basis. This means that the national debt would not rise because revenues lost by rate reduction would be offset by revenues gained by restricting existing tax preferences.
Therefore, Congress should finance a substantial lowering of the U.S. corporate tax rate largely by reducing the tremendous bias in the current tax code for debt and against equity. Most importantly, companies may deduct interest paid on all their debt, but may not deduct any dividends paid on their shares. As a result, the effective tax rate on corporate debt is negative 6.4%, as compared to positive 35% for corporate equity, according to the Congressional Budget Office.
Read the rest at realclearmarkets.com…
A 17% levy on foreign profits of U.S. companies to help finance a 5% rate reduction.
Last week Oregon Sen. Ron Wyden became the chairman of the Senate Finance Committee. Even as a liberal Democrat, he has supported two key goals of corporate tax reform: reducing the U.S. corporate tax rate and repatriating corporate profits held abroad. Sen. Wyden’s challenge will be implementing these goals without increasing the federal debt.
Though there is widespread support for reducing the 35% statutory corporate tax rate, which ranks among the highest in the world, the reduction cannot be financed by the plan President Obama touted in his State of the Union address: closing tax “loopholes.” Congress would have to find $1.2 trillion in new tax revenue over the next 10 years to fund a 10% rate reduction. But politicians can realistically repeal only $200 billion in tax loopholes, including the favorable tax treatment of corporate jets, incentive fees and drilling costs.
That’s because tax preferences are popular. Most of the major existing preferences are intended to promote economic growth, so they are supported by both Democrats and Republicans. The four tax preferences that generate the largest revenue losses are: tax credits for research and development, special deductions for U.S. manufacturing facilities, accelerated depreciation for capital investments, and tax-exempt interest from municipal bonds.
Rather than fighting about political untouchables, legislators should change the tax treatment of foreign profits of U.S. corporations. Under current law, foreign profits are subject to a 35% U.S. tax, but that tax may be deferred indefinitely if those profits are kept abroad. U.S. corporations are sheltering almost $2 trillion in profits abroad, according to Audit Analytics.
Read the complete article at wsj.com…