Bringing corporate earnings back into the U.S.

A member of Congress was walking along one of St. Bart’s sandy beaches on holiday. Suddenly she stumbled on an old lamp that had washed up on the beach. She picked it up, rubbed it and, of course, a genie appeared.

The genie said, “I am the most powerful genie who has ever lived. I can do great and wonderful things, including granting you your dearest wish, but only one.”

This member of Congress was well attuned to international affairs, so she pulled out a map of the Middle East and said her dearest wish was a solution to the Israeli-Palestinian conflict.

The genie stroked his beard; looked around worried and said, “Oh dear that is a tough one. You should probably make another wish.”

The congresswoman was disappointed.but understood. “Alright,” she said, “I want you to rewrite the American tax code so everyone can understand it.

After a long silence, the genie said, “Let’s have another look at that map.”

With Republicans back in charge of Congress, corporate tax reform is on the agenda for 2015. Although it is hard to see how they can reduce corporate tax rates without also doing something for individual taxpayers.

If congressional leaders can cobble together a set of reform proposals, their next problem would be how to pay for them. Given the large federal debt, many policymakers believe corporate tax reform should be revenue neutral. To do that, any reduction in corporate tax revenue must be made up for by things like eliminating tax preferences, cutting spending programs, or adding to the deficit passed on to future generations.

Achieving broad tax reform is further complicated by political realities of 2016 presidential politics. Several senators are considering a run.

While the prospects for broad tax reform may be dim, one bright spot is a bipartisan proposal by Sens. Barbara Boxer, D-California, and Rand Paul, R-Kentucky, to bring back some of the estimated $2 trillion of foreign earnings that are now parked in foreign banks by reducing the corporate tax rate on profits earned abroad from 35 percent to 6.5 percent for the next five years.

Revenue from this short-term tax would be used to maintain the solvency of the Highway Trust Fund that is scheduled to run out of money in May unless Congress and the president do something.

In theory, repatriating the money would also increase investment in plant and equipment and new technology, thereby strengthening the economy and creating jobs at the same time it increases federal revenues.

There is no assurance that the repatriated corporate earnings wouldn’t instead be used for things like executive compensation, higher dividend payouts, and stock buybacks.

The president also waded in this week. Instead of a voluntary repatriation tax holiday, his $4 trillion 2016 budget proposal includes a one-time 14 percent tax on the $2 trillion of foreign earnings held overseas, with much of the proceeds going to fund infrastructure. There is no reason to believe that Republicans will embrace this proposal.

It doesn’t have to be this way if Congress and the administration had the minerals to fund the HTF by increasing the 18.4-cent per gallon federal fuel tax for the first time since 1993. If adjusted for inflation, the fuel tax would be 30 cents a gallon today.

Corporate taxes should be addressed in the context of broader tax reform. The American people are sick and tired of short-term fixes and lurching from crisis to crisis. They want a system that is simpler, eliminates unfair and inefficient loopholes, and levels the playing field for the middle class.

originally published: February 7, 2015

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