Welcome to the latest installment of Advocacy Agenda, a periodic column that aims to share select insights and observations of interest to TEI members about the tax policy advocacy environment in Washington, D.C. Over the past three years, the historic tax reforms enacted in Public Law 115-97, colloquially known as the Tax Cuts and Jobs Act (TCJA), inspired many TEI members to become more involved in the Institute’s advocacy activities at the federal level.
The reason I say three years instead of four is important: the unprecedented speed with which the TCJA was enacted in 2017 effectively precluded any meaningful engagement in the legislative process.1 Accordingly, the overwhelming focus of TEI’s TCJA-related advocacy activity has been on influencing the law’s interpretation and implementation through sustained engagement in the regulatory process. The result, I believe, is a substantial contribution to the administrative record on behalf of corporate taxpayers and the in-house tax professionals who support them.
Fast-forward to today, and the entire paradigm appears to have changed. A new Democratic president and a Congress controlled by Democrats have already outlined a pair of major business tax reform plans, either of which has the potential to materially disrupt the post-TCJA US international tax system. Unlike in 2017, the prospect for meaningful, substantive engagement in the emerging legislative process appears to be relatively strong.
For better or worse, this summer and fall are increasingly likely to be a time of historic consequence for US federal tax policy—and one in which TEI is prepared to play a role.
Earlier this year I had the pleasure of working with the leaders of TEI’s Tax Reform Task Force to develop and refine TEI’s new Guideposts for Tax Policy, which are reprinted below. These guideposts are intended to articulate TEI’s three most important and broadly applicable principles of sound tax policy to inform the burgeoning tax reform debate in Washington, D.C. More important, they provide a solid foundation to support TEI engagement during this critical time. Please see below.
TEI Guideposts for Tax Policy
As the preeminent association of in-house tax professionals worldwide, Tax Executives Institute (TEI) is pleased to present our Guideposts for Tax Policy—a series of priority principles intended to inform the tax policymaking process in the 117th Congress and the Biden administration. TEI members are responsible for administering the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. The diversity and experience of our membership enables TEI to bring a balanced, practical perspective to some of the most challenging issues facing business taxpayers—and policymakers—today.
TEI commends the Congress for enacting a series of targeted tax relief measures to help businesses weather the economic downturn associated with the 2019 coronavirus (COVID-19) pandemic. As the White House and Congress pivot toward a new agenda, including a range of potentially significant tax law changes, however, we encourage policymakers to adopt the following guideposts as pillars of a sound analytical framework for evaluating those proposed changes.
Simplicity and Administrability
Simplicity and administrability are two of the most fundamental, well-established principles of sound tax policy.2 Simplicity is a gauge of compliance burden—the value of the time and other resources, including any out-of-pocket costs paid to tax preparers and other tax advisors, that taxpayers expend to comply with the tax laws.3 This includes the value of time and resources devoted to recordkeeping, learning about the law and planning, preparing and filing returns, and responding to Internal Revenue Service notices and audits.4 According to a recent report published by the National Taxpayers Union Foundation, businesses are estimated to have devoted a total of 3.344 billion man-hours to tax compliance in 2019 and suffered a net business income tax compliance burden of $177.7 billion.5 These figures are staggering, especially when one considers that they represent nonproductive expenditures—what economists vividly call “deadweight loss.”6
Administrability is a concomitant principle that refers to the costs incurred by the tax authority—ultimately borne by taxpayers—in processing tax returns and payments, enforcing the tax laws, and providing taxpayer assistance.7 Administrable tax systems allow the government to collect taxes as cost effectively as possible. And even though tax administration is generally considered the IRS’ responsibility, taxpayers, employers, and financial intermediaries such as banks and tax professionals also play important roles in administering the Internal Revenue Code.8
TEI believes tax laws should be simple to understand and apply so taxpayers know where they stand and can reasonably determine the tax consequences of contemplated transactions. As a corollary, TEI also maintains that changes in the tax law generally should not be applied retroactively.9 Simpler tax laws foster increased and more cost-efficient compliance by taxpayers and reduce the likelihood of errors or disputes with the IRS regarding the accuracy of returns, thereby facilitating the IRS’ administration and enforcement mandates. It follows, therefore, that simplicity and administrability should be essential tests for policymakers when evaluating proposed changes or additions to existing law.
Competitiveness and Economic Growth
In enacting the CARES Act and its progeny,10 Congress appropriately focused on measures intended to provide as much liquidity as possible, as quickly as possible, to employers facing widespread business restrictions and a range of other virus-related disruptions. As that focus now shifts toward ensuring the long-term, sustainable recovery of the US economy, however, new priorities emerge. Lawmakers must pursue responsive policies that not only consider how US businesses can efficiently access liquidity, without unnecessarily increasing corporate debt, but also instill confidence in the nation’s fiscal and regulatory environments such that businesses feel comfortable proceeding with projects and investing now to stimulate increased economic activity and employment in the United States.
We live in a world of increasing capital mobility due to increasing trade and decreasing communication and transportation costs, and the effect of taxes on the location of investment is more important today than ever before. For US businesses to compete effectively in the global marketplace, the price of operating in the United States cannot be disproportionately higher than it would be abroad. Currently in the United States, corporations are subject to a federal statutory income tax rate of twenty-one percent and an additional average state statutory rate of about six percent, for a combined rate of 25.8 percent—slightly above the current average among Organisation for Economic Co-operation and Development states of 23.4 percent.11
Any proposal to increase the federal corporate income tax rate would necessarily increase the US federal-state combined tax rate and, therefore, should contemplate the impact this potential increase in the relative cost of investment in the United States might have on American economic competitiveness. Policymakers should also recognize that frequent changes to the tax laws reduce their stability and can erode competitiveness by making business planning more difficult and increasing uncertainty about future tax liabilities.
TEI believes the tax laws should neither impede nor reduce the productive capacity of the US economy, nor should they pose competitive disadvantages for US-headquartered businesses relative to their non-US-headquartered competitors. TEI strongly supports maintaining, if not improving, the competitiveness of the US business tax system as a whole, and we respectfully urge policymakers to adopt a similar posture in their deliberations.
Avoidance of Double Taxation
Double taxation—when the same item is subject to income tax under the rules of two or more jurisdictions—has harmful effects on the international exchange of goods and services as well as on cross-border movements of capital, technology, and persons.12 Since 1918, Congress has repeatedly recognized the perils of double taxation in enacting and amending the foreign tax credit—a cornerstone of the US international tax system. The legislative history of the foreign tax credit evidences Congress’ belief not only that American prosperity depends on the competitiveness of US companies operating abroad but also that double taxation would unfairly impede this competitiveness.13
As policymakers contemplate different proposals to reform the US international tax system anew, TEI urges renewed vigilance in safeguarding US multinational businesses against the looming specter of double taxation. To the maximum extent practicable, policymakers should ensure that contemplated reforms to the US international tax system do not increase the incidence of unrelieved double taxation.
Watson M. McLeish is tax counsel for Tax Executives Institute, Inc. in Washington, D.C., where he supports the advocacy activities of the Institute’s Tax Reform Task Force, Federal Tax Committee, and Canadian Income Tax Committee. TEI members interested in joining—or proposing—an Institute-level advocacy project should contact him at firstname.lastname@example.org.
- The TCJA was introduced in the House of Representatives on November 2, 2017, and presented to President Trump for enactment into law on December 21—of the same year.
- See, for example, pages 15–16 of Department of the Treasury, Tax Reform for Fairness, Simplicity, and Economic Growth, vol. 1 (Washington, D.C: Department of the Treasury, 1984), https://home.treasury.gov/system/files/131/Report-Tax-Reform-v1-1984.pdf.
- US Government Accountability Office, Understanding the Tax Reform Debate – Background, Criteria, & Questions, GAO-05-1009SP (Washington, D.C.: US Government Accountability Office, 2005), gao.gov/assets/gao-05-1009sp.pdf. See pages 5, 45.
- Ibid., 46.
- Demian Brady, “Tax Complexity 2020: Compliance Burdens Ease for Second Year Since Tax Reform,” National Taxpayers Union Foundation, April 15, 2020, ntu.org/foundation/detail/tax-complexity-2020-compliance-burdens-ease-for-second-year-since-tax-reform. This accounts for corporations, partnerships, and other pass-through businesses (see pages 7–8).
- Joel Slemrod, “Tax Minimization and Corporate Responsibility,” Tax Notes 96 (September 10, 2002), 1523, 1527.
- US Government Accountability Office, Understanding the Tax Reform Debate—Background, Criteria, & Questions, 5–6, 49–50.
- , 49.
- Embedded in the principle that tax laws should be simple to understand and apply is the premise that taxpayers should be able to understand the law at the time they are making economic decisions. Such understanding is impossible, however, if Congress subsequently changes the law or the IRS reinterprets it. See J. D. Foster, “Sound Tax Policy vs. Retroactivity,” Tax Foundation, August 16, 1997, https://taxfoundation.org/sound-tax-policy-vs-retroactivity/. See also “State and Local Tax Policy Regarding Retroactive Legislation,” Tax Executives Institute, September 20, 2016, tei.org/sites/default/files/advocacy_pdfs/TEI-Policy-Statement-on-Retroactivity-9-20-2016.pdf. Also reprinted in Tax Executive, November/December 2016, 103.
- L. No. 116-136, 134 Stat. 281 (2020); Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182 (2020); American Rescue Plan Act of 2021, Pub. L. No. 117-2, 135 Stat. 4 (2021).
- Garrett Watson and William McBride, “Evaluating Proposals to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate Book Income,” Tax Foundation, February 2021, 2–3, https://files.taxfoundation.org/20210224151522/Evaluating-Proposals-to-Increase-the-Corporate-Tax-Rate-and-Levy-a-Minimum-Tax-on-Corporate-Book-Income1.pdf. According to OECD data, the current US federal corporate income tax rate less deductions for state and local taxes is estimated to be 19.73 percent and the average state corporate income tax rate is estimated to be 6.03 percent, which produces a combined corporate income tax rate of 25.77 percent. OECD, Addressing the Tax Challenges of the Digital Economy, Action 1: 2014 Deliverable (2014), 36. See, for example, HR Rep. No. 65-767, at 91 (1918), reprinted in 1939-1 C.B. (pt. 2) 86, 93; S. Rep. No. 94-938, at 233 (1976).Statement Regarding Retroactive Legislation,” Tax Executives Institute, September 20, 2016, tei.org/sites/default/files/advocacy_pdfs/TEI-Policy-Statement-on-Retroactivity-9-20-2016.pdf. Also reprinted in Tax Executive, November/December 2016, 103. Pub. L. No. 116-136, 134 Stat. 281 (2020); Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182 (2020); American Rescue Plan Act of 2021, Pub. L. No. 117-2, 135 Stat. 4 (2021). Garrett Watson and William McBride, “Evaluating Proposals to Increase the Corporate Tax Rate and Levy a Minimum Tax on Corporate Book Income,” Tax Foundation, February 2021, 2–3, https://files.taxfoundation.org/20210224151522/Evaluating-Proposals-to-Increase-the-Corporate-Tax-Rate-and-Levy-a-Minimum-Tax-on-Corporate-Book-Income1.pdf. According to OECD data, the current US federal corporate income tax rate less deductions for state and local taxes is estimated to be 19.73 percent and the average state corporate income tax rate is estimated to be 6.03 percent, which produces a combined corporate income tax rate of 25.77 percent.
- OECD, Addressing the Tax Challenges of the Digital Economy, Action 1: 2014 Deliverable (2014), 36.
- See, for example, HR Rep. No. 65-767, at 91 (1918), reprinted in 1939-1 C.B. (pt. 2) 86, 93; S. Rep. No. 94-938, at 233 (1976).