By Zach Bernstein and John O’Neill
If you’ve been following the news recently, you might have noticed there was a slight shakeup in Washington, D.C., with Rep. Paul Ryan (R-Wis.) taking over for the retiring John Boehner as Speaker of the House of Representatives, the third-highest office in the land.
This is significant news, especially if you’ve been wondering when – if ever – the federal government will take on reforming the tax code.
Speaker Ryan is probably as well-positioned for tax reform as any speaker ever. He made a name for himself as chairman of the House Ways and Means Committee, where any potential tax reform legislation would begin the march through Congress. The idea that the stars may be aligning for business-friendly tax reform is something everyone should be excited about.
There’s actually a lot to like with Ryan’s goals. For one, he favors broad reform over piecemeal changes. Moreover, many of his tax-reform goals are laudable: He wants tax reform to create domestic jobs, support American R&D, stop corporate inversions, bring home the $2 trillion in offshore corporate profits, and protect the U.S. corporate tax base.
On some major points, however, Speaker Ryan is off-target – and not taking a business-friendly approach to tax reform.
In the past, Ryan was enthusiastic about the prospect of taxing corporate profits held overseas to fund major infrastructure repairs. The plan he supported, however, would have ended the current practice of taxing overseas earnings at the U.S. tax rate, and instead institute what’s known as a territorial system. Under that system, profits earned in foreign countries would not be subject to taxes here.
Ryan’s stated goal is to encourage companies not to set up their headquarters overseas, and to end the process of tax inversions, where a company buys a foreign competitor then reincorporates the new merged company in a country where tax rates are lower. (Companies like Burger King and Walgreens made headlines last year when they made plans to invert; while Walgreens ultimately decided against it, Burger King went ahead.)
Unfortunately, a territorial tax system, like the kind Speaker Ryan supports, won’t secure the corporate tax base. When offshore profit is exempted, U.S. multinationals are likely to shift even more of their profits overseas. Most small business owners understand this – and think it’s unfair. That’s why 85 percent oppose a territorial system, according to scientific polling of small business owners.
One major reason for that is the use of offshore tax havens. This leads many corporations to officially incorporate in a foreign country, even as it actually operates in the U.S. (That’s how a five-story building in the Cayman Islands can legally be home to nearly 19,000 companies.) Companies can then shift profits to lower-tax countries to avoid paying taxes in the U.S. That brings the effective corporate tax rate down.
The problem with the territorial system that Speaker Ryan favors is that it misses a major point: The $2 trillion our multinationals currently hold offshore can be brought home any time. Corporations would just have to pay taxes on it. What’s more, giving corporations a pass on the taxes of their offshore profits likely won’t help our economy: Experience shows that when they bring that money home, most of it goes into shareholders’ pockets, not into creating new jobs.
Again, small business owners know this system is unfair – indeed, 76 percent of them want a system that limits shifting profits offshore, according to polling.
Everyone can agree that the tax code needs to be reformed. As the new speaker, there’s every reason to think Ryan has a shot. He has allies to work with in the Senate, including the chairman and ranking member of the Finance Committee, who both want broad tax reform.
But a number of his goals won’t help the vast majority of American businesses. Speaker Ryan must recognize that we’re in a period when the goals of some of our largest corporations don’t match the goals of our country, and that any tax reform needs to bring those goals into alignment.
In its current form, the U.S. tax code tends to favors multinational businesses over domestic ones, large businesses over small ones, and established businesses over startups. Tax reform must back entrepreneurs and their efforts to build businesses here at home.
So, congratulations to Paul Ryan on being elected speaker. It’s an important job. Now, for the sake of American businesses, he has some work to do.
Image credit: Gage Skidmore via Wikimedia Commons
Zach Bernstein is Manager of Research and Social Media and John O’Neill is Tax Analyst for the American Sustainable Business Council.
The <a href="http://asbcouncil.org">American Sustainable Business Council (ASBC)</a> is a network of companies and business associations. Its column, Policy Points, identifies public policies where a business voice, grounded in principles of innovation, fairness and environmental stewardship, can make an essential difference in the advocacy process. The goal is to arm readers with information and specific actions to take. As business leaders, we can and must support policy change to help make the economy more green and sustainable. The column editor is Richard Eidlin, ASBC's Vice President - Public Policy and Business Engagement.