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The U.S. Corporate Tax Code is Bananas

May 22nd, 2014

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A much-too-high corporate tax is causing companies to flee for Europe.

If any U.S. company seems ripe for moving to an island tax haven, it’s Chiquita. Based in Charlotte, the company’s sale of bananas, grown largely in Central America, accounts for two-thirds of its profits. But Chiquita isn’t bound for the tropics. It’s headed to Ireland, where the climate may be hostile to banana trees, but the cool 12.5 percent corporate tax rate feels just right.

Later this year, Chiquita will merge with Fyffes, an Irish fruit distributor half its size. Usually the larger company buys the smaller one, but not anymore. Entirely because of taxes, a newly formed Irish company will control the merged companies. Chiquita will remain listed in the U.S., but its headquarters will move to Dublin, unlocking access to the favorable Irish tax code.

Chiquita’s move, called corporate “inversion,” isn’t new. It’s an old strategy that U.S. companies have rediscovered. Everyone in Washington — Democrats and Republicans — should be concerned. Though completely legal, new inversions this decade will costs the Treasury nearly $2 billion a year, and they move high-paying corporate jobs overseas, albeit in limited numbers. Inversion happens because our bloated corporate tax code is bad public policy, severely handicapping U.S. businesses relative to their foreign competitors.

Inversion first became popular in the late 1990s when companies like Ingersoll-Rand and Fruit of the Loom reincorporated in Bermuda and the Cayman Islands. Then Washington started playing whack-a-mole, but not doing it very well. IRS rules targeting inversion didn’t work, so in 2004 Congress passed a law making moves to offshore havens more difficult.

The law now requires an American company looking to move its headquarters overseas to use a merger or acquisition with a foreign company at least one-fifth its size. This mostly took the Caymans out of the picture, because only shell companies locate there. But Europe is a more attractive corporate destination than it was 15 years ago. Countries like Ireland, the Netherlands and the UK noticed that in today’s globalized world, a competitive corporate tax code matters more than ever. So they lowered their corporate tax rates and eased taxation of foreign-earned income.

Meanwhile, the U.S. tax code sat rotting on the shelf. Our 35 percent statutory rate is highest among the world’s developed economies. While few companies pay an average rate that high, numerous tax preferences raise compliance costs and skew incentives.

One example is the “lockout effect.” Because some corporate profits are taxed only when returned to the U.S., many U.S.-based multinationals keep piles of cash on the books of their overseas subsidiaries. If it’s not coming home, that cash may be deployed to purchase a foreign company. When the selling company is big enough, the U.S. buyer can invert and avoid even more taxes.

If inversion were limited to bananas, maybe we wouldn’t care. But oil and gas companies, drug companies and others have exported their U.S. headquarters in recent years. Altogether, since 2012, at least 14 U.S. companies have completed or considered inversion deals. This month’s on-again, off-again takeover talk between Pfizer and AstraZeneca is one example. U.S. companies look to inversion not because CEOs wake up one day and feel the pull of the old country, but because they are seeking to maximize profit in the face of foreign competition. The pace is likely to accelerate, because as much as we may decry it, inversion currently makes financial sense.

In response, President Obama proposed in his 2015 budget that Congress raise the inversion foreign ownership threshold to 50 percent. This month, Senator Ron Wyden, D-Ore., and Sen. Carl Levin, D-Mich., are crafting legislation modeled after Obama’s proposal.

These efforts show Congress is taking inversion seriously. But let’s also realize that our uncompetitive code is the root of the problem. Only when Washington fully reforms the corporate tax code will the pressure for companies to leave the U.S. tax system subside.

First, the 35 percent corporate tax rate must come down, at least to President Obama’s proposal of 28 percent and preferably further. The cut can be financed in part by eliminating some outdated tax breaks, but savings elsewhere may also be necessary. Second, the lockout effect has to end. Some foreign-earned income, particularly passive income, should be taxed currently no matter where it’s earned. And income from real business activity abroad should be lured home with a tax rate competitive with those of other developed countries. Third, the tax code needs to be simplified.

A simpler, more competitive corporate code shouldn’t be confused for a giveaway to corporations or the wealthy. Research suggests that if Chiquita were to spend less preparing and paying corporate taxes, its shareholders and its workers share the benefit. Most importantly, so would the broader U.S. economy, which would attract and retain more business and more jobs. It’s bananas for the U.S. to sit back and do nothing as good American companies decamp for Europe

This piece was originally published in U.S. News & World Report

More on our Minimum Pension

April 10th, 2014

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We appreciate EPI’s comments on our New York Times op-ed in which we unveil a new proposal for a minimum pension. Ms. Morrissey poses several questions and calculations that we wish to answer.

Ms. Morrissey argues that a life-cycle account with its mix of stocks and bonds is too aggressive an investment for worker pensions. We respectfully disagree. However, this is immaterial because investors in our Savings Plan for Universal Retirement (SPUR) accounts would have a choice of fund options just as federal employees have today under the Thrift Savings Plan (TSP). Individuals could choose less aggressive or more aggressive options, but each fund would be well-diversified. The TSP, with fees only a fraction of those charged for 401 (k) plans, is working well for millions of current and former federal employees. A similar set-up, with low fees and diversified funds, should work well for everyone else.

Ms. Morrissey’s estimated cost to business is wildly inflated. She asserts the plan would generate new costs for the employers of all 165 million workers covered by Social Security. To reiterate from the op-ed, any employer that provides a retirement plan that is at least as generous as our proposal would face no new requirements. That would include virtually every public employee, teacher, cop, nurse, firefighter, municipal trash collector, and congressional employee. Practically any private company that provides a defined benefit or defined contribution to a plan would fulfill the requirement. That includes most white collar jobs, most union jobs, as well as jobs at think tanks like Third Way and, presumably, EPI. And as our forthcoming idea brief will explain, those who have already reached retirement age, would not have to participate.

According to the Employee Benefit Research Institute, 43 million full-time, full-year workers ages 21-64 are not currently enrolled in an employer-sponsored plan. Another 30 million part-time or part-year workers in the same age group would be affected, but their enrollment would be less expensive since the cost is based on hours worked. So in total, the magnitude of required new contributions would be about one third of what Ms. Morrissey estimates. More importantly, this is not a lost cost to businesses. It will improve the quality of their employment packages and raise the compensation of their workers. And, unlike health premiums, a minimum pension is a fixed, predictable, cost.

Still, the cost to business is real, particularly in the near-term, because wages are “sticky-down.” That is, employers are averse to cutting wages in nominal terms. So they are likely to bear most of the cost in the early years. To help employers start contributing—and to keep even modest downward pressure on working people’s wages at bay—government can pick up some of the tab. For example, modest adjustments to the maximum allowable contributions to 401 (k)-type plans would raise nearly $100 billion, according to the CBO. This revenue could be applied to help offset the costs to small and medium-sized businesses.

Ms. Morrissey also writes that workers could still outlive their savings if they opt out of an annuity and take their nest egg in a lump sum at retirement. Our plan’s default option is an annuity, which would last for the life of the owner, because we think that’s best. But if a worker prefers to take a lump sum or withdraw at her own pace, she should have that right. After all, it’s her money.

Finally, there is Social Security. Our proposal has no more impact on Social Security than private sector retirement plans do now. And nothing in our proposal will change the fact that Social Security is scheduled to become insolvent in 2031. Some believe solvency should be achieved by raising taxes alone. Some believe it should be achieved solely by cutting benefits. And some believe it will require a combination of the two. We fall into the latter category and believe it can be done while increasing benefits for low-income seniors. But that is separate and apart from our minimum pension proposal.

How to Save Social Security

May 31st, 2013

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There are a lot of charts, numbers, and projections in the annual report released by the Social Security Trustees Friday, but they really boil down to this: Social Security’s trust fund has 20 years to live.

Started in 1935 as the first major strand in America’s safety net, Social Security will arrive at insolvency at the venerable age of 98. By ignoring this reality, Congress is guaranteeing that the program’s reserves will expire, forcing benefits for the retired and disabled to immediately fall by 23 percent starting in 2033.

But the retired and disabled won’t be the only victims. The rising cost of Social Security and health care programs is crowding out investments in kids and future generations. In the mid-1960s, the federal government spent three dollars on investments — in education, research, and infrastructure — for every one dollar on entitlements. In 2023, it will spend one dollar on investments for every five dollars on entitlements. That means less money for teaching kids, curing diseases, and building roads.

The question now is whether the same dysfunctional Congress that cannot seem to muster enough votes to name a post office can touch the third rail of politics, to keep Social Security from going down and taking public investments with it.

To that we answer a loud no and yes. No, Congress is unable to develop and pass a Social Security solvency plan with the necessary super majority in the Democratic Senate and a majority in the Republican House. That piece of legislation is a fantasy. But the same two chambers could pass a law that outsources the job to a commission, to develop the plan and leave Congress in the position with only two choices: vote yes on the commission plan to save Social Security or vote no to let its financing dry up. Read the rest of this entry »

Tax reform progressing in spite of fiscal gridlock

March 11th, 2013

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President Obama and his Republican dining companions showed last week that bipartisan schmoozing is back. Whether bipartisan deal-making will follow is anyone’s guess. But if it does, there are reasons to believe tax reform will be on the menu.

The most visible movement on tax reform is in the House of Representatives. Speaker John Boehner (R-OH) last week announced that the bill name “H.R. 1” would be reserved for tax reform. Traditionally, House speakers have given that title to bills that are among their top priorities. Consider some of the recent bills with that name: the stimulus package of 2009 and the Medicare prescription drug law of 2003.

The H.R. 1 designation signals the end of an internal Republican dispute over whether to proceed with tax reform. Majority Leader Eric Cantor (R-OH) previously advised the party to avoid the issue, because its progress could require votes on controversial topics like the mortgage and charitable deductions. But now, with Boehner’s blessing, House Ways and Means Committee Chairman Dave Camp (R-MI) has a green light to pursue his priority issue.

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Corporate tax reform is coming to town

December 21st, 2012

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Those hoping for a fiscal cliff deal this year won’t get their wish before Christmas. But if Santa does deliver a year-end budget deal a few days late, it’s increasingly likely that it will pave the way for corporate tax reform in 2013.

The reasons to wish for corporate tax reform—and the obstacles in its way—were the topics of debate at an idea forum hosted by Third Way and the RATE Coalition on December 5th. Senator Tom Carper (D-Delaware), RATE Coalition Co-chair Elaine Kamarck, Time Warner Cable Senior Vice President & Chief Tax Officer Mark Schichtel, and Pacific Gas & Electric (PG&E) Vice President Melissa Lavinson discussed the push to lower the corporate rate, as well as the challenges involved.

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A Grand Bargain, the Old School Way

September 20th, 2012

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The U.S. economy keeps inching toward the fiscal cliff—the combination of spending cuts and tax increases set to occur at the end of this year.

But even as legislators leave town for the election, momentum is slowly building in Washington for a grand bargain to avert the cliff and reduce long-term deficits. We’re seeing increased discussion behind the scenes on the Hill, and additional momentum for a fiscal deal is coming from think tanks, advocacy groups, and CEOs.

We’re glad to hear the voices growing. Third Way has long argued that we can’t wait any longer to forge a deal on the debt—that the fiscal cliff presents a now-or-never opportunity for a deal. And Third Way’s founders, in a recent Politico column, urged Democrats to get specific about new revenue and spending cuts in a balanced plan.

Last week the wave of momentum was amplified by former Treasury secretaries James Baker and Robert Rubin, who joined a small bipartisan army of retired legislators speaking at the Center for Strategic and International Studies (CSIS).

The choice of two ex-Treasury chiefs to lead a charge of fiscal pragmatism is no surprise. As Reagan’s chief of staff, Baker brokered the 1982 deficit reduction deal, which combined tax increases with spending cuts. Rubin directed the National Economic Council when Clinton signed a budget deal in 1993.

These elder statesmen laid out their respective approaches to today’s deficit problem, admittedly much bigger than those they faced while in power. True to their parties, the two have major substantive differences on how to reduce the deficit.

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