1

CON: A Bill To Reform Federal Corporate Taxation 1. 2. 3. 4. Contents A Bill To Reform Federal Corporate Taxation: Background Information & Commentary Minimum Tax On Foreign Earnings (Instead Of Territorial) Corporate Taxes Are Competitive, No Need To Lower a. Effective Rate, Not Statutory Rate, Provides A Complete Measure b. Effective Rate Is Competitive U.S. Corporate Taxes Are Competitive, No Need To Lower Continued a. Corporate Taxes As A Percentage Of GDP Is Lowest In Us Counterplans a. Corporate Tax Should Be 29.5% To Be Revenue Neutral b. Corporate Tax Should Be 26% To Be Revenue-Maximizing Miscellaneous a. Why Corporate Income Tax Going Down As % Of GDP b. Public Opinion Of Corporations Polls

5. 6.

7.

2
A Bill to Reform Federal Corporate Taxation Background Information & Commentary SECTION 1. The United States Congress, in conjunction with the IRS, will decrease the base rate at which top bracketed corporations are taxed from the current 35% rate to a 25% rate. SECTION 2. The top tax bracket shall be defined as corporations making over $18,333,333 in one year. The top tax bracket is currently at $18,333,333 according to the 2011 IRS Instructions for Form 1120 (see right). SECTION 3. Any and all corporate deductions shall be eliminated unless voted on and passed by a supermajority vote in the House of Representatives. Unconstitutional? This bill just wants to bypass the senate and the president?
U.S. Constitution: Article I, Section 7 (http://www.archives.gov/exhibits/charters/constitution_transcript.html) All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills. Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States: If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law. Every Order, Resolution, or Vote to which the Concurrence of the Senate and House of Representatives may be necessary (except on a question of Adjournment) shall be presented to the President of the United States; and before the Same shall take Effect, shall be approved by him, or being disapproved by him, shall be repassed by two thirds of the Senate and House of Representatives, according to the Rules and Limitations prescribed in the Case of a Bill. IRS, 2012 (http://www.irs.gov/app/understandingTaxes/teacher/whys_thm01_les02.jsp#Background) The U.S. Constitution describes a formal tax legislation process. A proposed tax law, called a bill, follows specific steps, beginning in the Ways and Means Committee of the House of Representatives. After a tax bill is approved by both the House and the Senate, it goes to the president, who can either sign the bill into law or veto it. The following are specific steps in the process: 1. The tax bill is initiated in the House of Representatives and referred to the Ways and Means Committee. When members of this committee reach agreement about the legislation, they write the proposed law. 2. The bill goes to the full House, where it is debated, possibly amended, and eventually approved. 3. The bill goes to the Senate, where it is reviewed and often rewritten by the Finance Committee. The committee's version is then presented to the full Senate. 4. After the Senate approves the bill, it is sent to a joint committee of House and Senate members, who try to arrive at a compromise version. 5. The compromise version of the bill is sent to both the House and the Senate for approval. 6. After Congress passes the bill, it goes to the president, who can either sign it into law or veto it. 7. If the president vetoes the bill, Congress may try to override the veto with a two-thirds vote of each house. If this vote succeeds, the bill becomes law without the president's signature.

SECTION 4. The US corporate tax system shall also be reformed into a territorial system as opposed to the current universal system. The United States currently operates under what is known as a worldwide tax system, meaning that business income is taxed at the U.S. rate regardless of whether the income is earned within American borders or overseas. Under this collection method, American companies pay the corporate tax in the host country, and when profits are repatriated back to the United States, the company pays the difference between what was paid to the host country and what would have been owed under the U.S. rate. SECTION 5. This law will take effect on the first day of the new fiscal year after passage. SECTION 6. All laws in conflict with this legislation are hereby declared null and void.

3
MINIMUM TAX ON FOREIGN EARNINGS (INSTEAD OF TERRITORIAL) White House and Republican tax writers are taking opposite tacks on taxing corporate profits from overseas operations. Currently, United States corporate operations abroad are subject to the host countrys taxation rate. After those taxes are deducted, remaining profits may be subject to United States taxation, but only if they are brought back to the country. Republicans want to move to a so-called territorial tax system, in which operations in the United States would be subject to the corporate income tax, but operations abroad would be subject only to the taxes of the host country. Mr. Obama wants to set a minimum tax for overseas profits, whether they are brought home or invested abroad. Seth Hanlon, Center for American Progress, Why We Need A Minimum Tax on U.S. Corporations Foreign Profits, February 10, 2012 o Currently incentives embedded in the tax code encourage U.S. companies to invest and create jobs overseas rather than here at home. Among the main reasons the U.S. tax code rewards offshore investment are the loopholes and porous rules that allow multinational companies to avoid U.S. taxes by reporting much of their profits in tax havens such as Bermuda and the Cayman Islands. Shifting profits into tax havens costs the U.S. Treasury tens of billions of dollars in revenue every year. o A corporate minimum tax would: Eliminate or reduce the financial benefits of artificial profit shifting Lessen the tax codes bias toward foreign investment Help level the playing field among multinational and domestic businesses Help level the playing field between businesses that produce mobile, intangible assets and businesses that have relatively immobile, tangible assets Raise needed revenue
o Deferral can be extremely valuable because it allows U.S. companies to reinvest profits overseas indefinitely without paying U.S. corporate taxes. It is all the more valuable for companies that are able to avoid foreign taxes by reporting profits in low-tax or no-tax countries. In 2008 six of the seven countries where U.S. multinationals reported their largest profits had effective corporate tax rates of 4 percent or lower: the Netherlands, Luxembourg, Ireland, Bermuda, Switzerland, and Singapore. (see Figure 1)U.S. multinationals claim extraordinary levels of profitability in these and other low-tax countries. They reported $2.6 million in profit per employee in Bermuda in 2008 and $5.4 million per employee in 2007, compared to a total worldwide ratio of about $40,000 per employee. Something is wrong with this picture.

The President's Framework for Business Tax Reform (A Joint Report By the White House and Treasury Department) February 2012 o Require companies to pay a minimum tax on overseas profits. The President believes we must prevent companies from reaping the benefits of locating profits in low-tax countries, put the United States on a more level playing field with our international competitors, and help end the race to the bottom in corporate tax rates. Specifically, under the Presidents proposal, income earned by subsidiaries of U.S. corporations operating abroad must be subject to a minimum rate of tax. This would stop our tax system from generously rewarding companies for moving profits offshore. Thus, foreign income deferred in a lowtax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country. This minimum tax would be designed to balance the need to stop rewarding tax havens and to prevent a race to the bottom with the goal of keeping U.S. companies on a level playing field with competitors when engaged in activities which, by necessity, must occur in a foreign country.

4
U.S. CORPORATE TAXES ARE COMPETITIVE, NO NEED TO LOWER EFFECTIVE RATE, NOT STATUTORY RATE, PROVIDES A COMPLETE MEASURE Government Accountability Office (GAO), August 2008, Report to the Committee on Finance, U.S. Senate: U.S. Multinational Corporations www.gao.gov/new.items/d08950.pdf o Statutory tax rates do not provide a complete measure of the burden that a tax system imposes on business income because many other aspects of the system, such as exemptions, deferrals, tax credits, and other forms of incentives, also determine the amount of tax a business ultimately pays on its income. EFFECTIVE RATE IS COMPETITIVE United States 2011 effective marginal corporate tax is less than the G-7 average:

U of Michigan Law & Econ, Empirical Legal Studies Center Paper No. 11-015, October 24, 2011, University of Michigan law professor Reuven Avi-Yonah and Ben Gurion University economist Yaron Lahav, The Effective Tax Rate of the Largest US and EU Multinationals o This paper compares the effective tax rates of the 100 largest US multinationals to the 100 largest EU multinationals for the period 2001-2010, based on financial disclosures. The paper finds that despite the higher US statutory rate the effective tax rates are comparable and that EU multinationals tend to have a higher effective tax rate. The likely explanation is that EU corporate taxes have a broader base. The paper concludes that current US tax law does not subject US based multinationals to a competitive disadvantage against their EU based competitors. th Aviva Aron-Dine, Center on Budget and Policy Priorities, June 4 2008, Well-Designed, Fiscally Responsible Corporate Tax Reform Could Benefit the Economy: Unpaid-For Rate Cuts Would Likely Hurt Most Americans in the Long Run o The Treasury Department, the Congressional Budget Office (CBO), and other researchers have found that effective corporate tax rates the share of the return on corporate investment that is actually paid in taxes are far lower than the statutory rate and, depending on the category of investment, are similar to, only modestly higher than, or significantly lower than effective corporate tax rates in other developed countries. nd David Kocieniewski , New York Times, May 2 2011, U.S. Has High Tax Rates But Pays Less o By taking advantage of myriad breaks and loopholes that other countries generally do not offer, United States corporations pay only slightly more on average than their counterparts in other industrial countries.

5
U.S. CORPORATE TAXES ARE COMPETITIVE, NO NEED TO LOWER CONTINUED CORPORATE TAXES AS A PERCENTAGE OF GDP IS LOWEST IN US United States actually has the lowest corporate tax burden of any of the member nations of the Organization for Economic Cooperation and Development. (See right) Jim Puzzanghera, Los Angeles Times, April 20 2011, Bipartisan support builds for slicing corporate tax rate o Nearly a third of all federal taxes came from corporations in 1952. Last year, they paid just 8.9%, according to government figures. Loopholes, credits and the ability to shelter earnings abroad have helped many of the country's biggest companies pay far less than the corporate tax rate set into U.S. law.
th

6
COUNTERPLANS CORPORATE TAX SHOULD BE 29.5% TO BE REVENUE NEUTRAL Congressional Research Services, March 31 , 2011 International Corporate Tax Rate Comparisons and Policy Implications Jane G. Gravelle, Senior Specialist in Economic Policy o If every corporate tax expenditure were repealed, including those mentioned previously, the corporate rate
st

could be cut by 5.6 percentage points, to 29.4%, assuming no behavioral responses.

Michelle Hirsch, The Fiscal Times, November 2 , 2011, Corporate Tax Reform Hits a 25 Percent Roadblock o If all corporate tax expenditures were axed, the lowest the rate could go and remain revenue neutral would be 28 percent according to a new analysis from the Joint Committee on Taxation of the US th Congress (October 27 , 2011). rd U.S. Department Of The Treasury, July 3 , 2007, Treasury Conference On Business Taxation And Global Competitiveness o If the revenue from tax preferences were used to lower the corporate tax rate, the rate could be lowered from 35 percent to 27 percent while producing approximately the same revenue. CORPORATE TAX SHOULD BE 26% TO BE REVENUE-MAXIMIZING National Center For Responsive Politics, Mehreen Younis, September 29, 2008, The Case for Corporate Income Tax Cuts http://www.ncpa.org/pub/ba633 o Over the 2000 to 2005 period, according to the U.S. Treasury Department, average corporate income tax revenue as a percentage of GDP was one-third greater in OECD countries (3.4 percent) than in the United States (2.2 percent). The revenue-maximizing corporate tax rate in developed countries was about 34 percent in the late 1980s and has declined steadily to about 26 percent in recent years, estimate Alex Brill and Kevin
Hassett of AEI. Thus, at 39.25 percent, the U.S. corporate tax rate is not only high but also inefficient in producing revenue.

nd

National Center For Responsive Politics, Mehreen Younis, September 29, 2008, The Case for Corporate Income Tax Cuts http://www.ncpa.org/pub/ba633 o The average corporate tax rate in 19 OECD countries fell from 45 percent in 1985 to 29 percent by 2005 (16%), while corporate tax revenues soared from 2.6 percent to 3.7 percent of gross domestic product (GDP).

7
MISCELLANEOUS Jim Puzzanghera, Los Angeles Times, April 20 2011, Bipartisan support builds for slicing corporate tax rate o The top tax rate for corporations has dropped from 52% in 1952 to 35% today. That has led corporate taxes as a share of U.S. economic output to decrease from 6.1% in 1952 to 1.3% last year. But tax experts said another reason for the decline is the dramatic expansion over the last 30 years of business owners' paying taxes on their individual returns. That has shifted hundreds of billions of dollars from the corporate side of the tax ledger.
th