U.S. International Tax Policy: 10 Questions for 2015
The year 2015 promises to be an active one in U.S. international tax policy, as new players take the stage in the tax reform debate, the Base Erosion and Profit Shifting (BEPS) effort continues to develop and even begins to go into effect around the world, and corporate inversions remain a hot tax policy topic after a year of intense publicity and aggressive executive action. Against this backdrop, 2015 likely will feature a great deal of activity in the international tax arena, even if fundamental changes to the U.S. international tax regime remain unlikely in the near term. Here are 10 pressing questions that may be answered as the year unfolds.
1. Can “business only” tax reform be made to work?
It is widely agreed that President Obama and congressional Republicans are too far apart on individual income tax policy to make that a productive area of discussion. On the other hand, it is often said that the two sides “are not that far apart” on business tax reform, in the sense that almost everyone agrees that the U.S. corporate income tax rate is too high and that the tax base should be broadened in at least some respects as part of a rate reduction effort. Thus business tax reform could be an area of constructive engagement during 2015. More detailed discussions over the course of this year will reveal how much agreement there really is between the two sides, as well as how challenging it will be to design a coherent business tax reform approach without broadly implicating the individual income tax rules, in light of the fact that so much business is conducted through pass-through entities whose income is taxable under the individual regime.
2. Can policy makers agree on revenue goals for business tax reform?
It is likely that President Obama and congressional Republicans can agree that revenue-neutral business tax reform would be a worthwhile objective, if reform could improve the efficiency, perceived fairness and administrability of the rules. However, disagreements might arise as to whether, for example, the legislation must be revenue-neutral over the conventional 10-year budget window, or indefinitely in a “steady state.” If there is a one-time surge in tax revenues from a deemed repatriation of foreign earnings as a transition into a territorial dividend exemption system, will that enable the enactment of policies with negative longer term budget effects as conventional budgeting principles would permit, or will President Obama invoke steady state neutrality to require dedication of this one-time revenue surge to other priorities, such as infrastructure spending, as indicated in the president’s fiscal year (FY) 2016 budget proposal? The latter scenario would mean that the permanent policy would have to tilt more heavily towards base broadening in order to accomplish tax reform on a revenue neutral basis.
In addition, the concept of revenue neutrality for a business tax reform package as a whole may obscure many other revenue effects of potential interest. In particular, various segments of the business community (e.g., large multinationals, smaller businesses, U.S.-based companies, non-U.S.-based companies, various industrial sectors) will be interested in whether tax reform is revenue neutral for them, or if instead they are being called upon to finance someone else’s tax cut (or benefiting from someone else’s tax increase). Accomplishing revenue-neutral business tax reform to the satisfaction of both major political parties and all of these different segments of the business community will be a challenge.
3. Will “dynamic scoring” materially lighten tax reform’s base-broadening load?
Although conventional revenue estimates are already “dynamic” in the sense that anticipated behavioral responses to proposed legislation are taken into account (i.e., microeconomic analysis), these estimates historically have been “static” in the sense that the macroeconomic baseline (overall size of the economy) is held constant. For the vast majority of business tax proposals, this distinction is of no consequence, as only the very broadest business tax proposals would be more than a drop in the macroeconomic bucket in view of the size of the U.S. economy. But for the most significant changes, such as a several-point reduction in the corporate income tax rate, there may be macroeconomic effects as well, and congressional Republicans are taking steps to account for these effects in scoring the revenue effects of tax reform. Their hope is that macroeconomic growth expected to result from large tax-cutting measures could boost projected tax receipts, thereby partially offsetting the more direct revenue-losing effects of such measures. This in turn would reduce the amount of base broadening necessary to accomplish tax reform on a revenue-neutral basis, making tax reform an easier lift.
