Friday, June 12, 2009

Battle of the revenue estimates

As noted in several news articles with links at the TaxProf blog, the Joint Committee on Taxation estimates that President Obama's international tax proposals will bring in about $50 billion less than the Administration had estimated, over the period from 2011 (when the proposals would take effect) through 2019.

I thought it might be helpful to show the line by line comparisons of the estimates for the main proposals applying to U.S. multinationals:

1) Defer deductions for (other than research & experimentation) that current law apportions or allocates to foreign source income that is deferred: $60.1 billion according to the Administration, versus $51.5 billion according to the JCT. I guess we could say this one is not entirely un-close.

2) Deny foreign tax credit where the associated income isn't recognized and require pooling approach for determining which foreign tax credits are made available by repatriation: $43 billion according to the Administration, versus $55.7 billion (the sum of two amounts estimated separately) according to the JCT. The JCT is higher here, and higher for changes 1 & 2 combined. I wonder if a difference in "stacking" convention is operating here (e.g., when either of two proposals, standing alone, would raise a given dollar, to which of them do you credit it?).

3) Prevent use of "disregarded entities" in overseas tax planning: $86.5 billion according to the Administration, versus $31 billion according to the JCT.

This last one seems to be the source of the big difference. Everything else, including proposals for individuals, adds up roughly the same as between the two sets of estimates over all. So evidently the big disagreement concerns item # 3 above, which would eliminate a device that multinationals use to shift income abroad from high-tax to low-tax jurisdictions without thereby (as would happen if they did it more straightforwardly) incurring a deemed dividend to the U.S. parent under subpart F in the U.S. international rules.

I must say, even without analyzing any data, I thought the Administration's estimate of the disregarded entities change seemed a bit high. I would assume that, as between the two estimates, the one by the JCT (a) treats taxpayers as much more able to find alternative routes to the same tax planning ends, and/or (b) assumes that taxpayers give up on their overseas tax planning maneuvers, since subpart F would now eliminate the benefit, and therefore they end up paying higher taxes to the source jurisdictions, rather than to the U.S. Treasury.

The Obama international tax proposals were probably DOA (in the short run at least) anyway, given the combination of (a) bipartisan opposition, (b) the existence of higher-priority legislative issues, and (c) the lack of top staff on hand in Treasury (especially given the sad recent news that Beth Garrett has withdrawn her candidacy for the Assistant Secretary of the Treasury for Tax Policy position).

A couple of quick points about the disregarded entities proposal:

(a) It merely corrects a mistake that the Treasury made in 1997 when it changed the rules for classifying ambiguous legal entities as C corporations or not for purposes of the U.S. federal income tax. The Treasury surely has the power to act unilaterally on this by fixing the regulations, only (a) under federal budget rules, the Administration then wouldn't get credit for the extra revenue (though obviously the budget deficit would reflect whatever revenue came in, and (b) Congressional leaders, hearing angry complaints from U.S. multinationals, might regard it as a breach of comity. But this doesn't mean the Administration's proposal is good - the past mistake is water under the bridge, and the question of interest today is whether the proposed legislative change would on balance be good or bad policy.

(b)The proposal clearly makes sense IF one favors the use of subpart F to prevent companies from shifting business income abroad from the true source jurisdictions to tax havens. Note that the source jurisdictions could do this themselves (and get the revenue) if they wanted, such as through tougher rules for transfer pricing and the use of debt to strip away local earnings. Perhaps they don't want to because they see it as a targeted tax break for mobile capital investment. I myself am on the taxpayers' rather than the Obama Administration's side in this debate, on the view that the proposal would result in revenue-raising for other countries not the U.S., or else simply lead to reallocation of who does foreign business investment from U.S.-incorporated to non-U.S. incorporated companies.

Clearly it's in the U.S. national interest, all else equal, for companies owned by U.S. individuals to pay lower taxes abroad (since the money goes to someone else, not to us). To take an opposite and pro-Administration view of this issue, one might have to either (a) believe that we still come out ahead from reciprocal anti-tax avoidance efforts, which strikes me as unlikely, or (b) view the lower tax rates abroad as likely to reduce investment and revenues in the U.S., which the empirical evidence (with good logical underpinnings) tends to rebut.


straddle1092 said...

The problem with the Obama administration proposal on disregarded entities is that it is not limited to the Subpart F purposes only and, if enacted as described, would wreak havoc on tax and business planning that has nothing to do with foreign tax avoidance.

Anonymous said...

We definitely need to be paying lower taxes. This idea of raising taxes as a catch-all solution is ridiculous.

The U.S. Chamber of Commerce has done great work to help keep taxes low and simple. They've been assessing our country's strengths and weaknesses and outlining the public policies we must pursue to succeed in the world economy. I was glad I could help take action on their web site (here) with several petitions focusing on the economy and labor reform.