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What Is This “International Tax Reform” of Which You Speak?

August 06, 2015

Tax reform. Two words that get thrown around a lot in Congress. Everyone’s for it, but yet everyone has their own idea of what it looks like. And the term can mean vastly different things in different contexts.

So we thought it would be helpful to drill down on exactly what it is this committee is exploring right now—international tax reform—and why.

There’s no doubt we need to fix our entire tax code. But with a president who wants more carve-outs and higher rates on families and small businesses, and a Republican Congress that believes in a flatter, fairer tax code with lower rates for everyone, enactment of comprehensive tax reform will have to wait for a new president.

But that doesn’t mean we can’t advance something more limited right now that would boost the economy, create—and keep—good jobs in the U.S., and put us in a better position for a complete rewrite of our tax code in 2017.

With that in mind, what we’re focused on today is the part of the code that deals with the way the United States taxes profits earned when companies sell their products across national borders.

This isn’t broad business tax reform. It’s not even what would be considered corporate tax reform. It’s more narrowly targeted than that. But it’s still critically important.

Why’s that?

Well, we’ll be explaining more about the need for international tax reform in the coming weeks and months, but here’s the short answer: American companies are inverting and being taken over by foreign competitors at an alarming rate; this trend and new international pressures are threatening U.S. jobs; foreign governments are increasingly levying taxes on American companies, eroding our tax base; and a lock-out effect is keeping more than $2 trillion of American capital parked overseas. (We talked more about this last point yesterday.)

In short, if we’re triaging our ailing tax code, the international component is in the worst shape, and inaction could have serious consequences for our economy.

So what does it look like?

First off, when contemplating international reform, think more about rules, and less about rates. There’s a lot to it, but it boils down to this: how can we set up the system so that American businesses can make things here at home, sell them overseas, and keep those profits and those jobs in the United States.

Senators Rob Portman (R-OH) and Charles Schumer (D-NY) released a bipartisan framework last month that neatly outlines the different parts of an international tax reform plan. It would fundamentally change how we tax profits made overseas, put in place a low one-time toll charge on foreign-held capital so that it can then come back home tax-free, crack down on tax havens that erode the corporate base, and help level the playing field with a special lower rate for income tied to intellectual property. (More detail on that here)

There is no substitute for comprehensive reform of our entire tax code. And a lower corporate tax rate would surely help make us more competitive with the rest of the world. But this kind of international plan would modernize our system and stem the bleeding until we can achieve that kind of broader reform. It could also provide a base for the extension of other important provisions of our tax code—particularly for families and small businesses—set to expire, and perhaps even help address our persistent highway trust fund challenge.

So that’s what we’re at work on. Of course, any version of tax reform is hard. It upsets the status quo. It requires trade-offs. But we have an obligation to see what is possible.

Because, if we don’t act soon, more American companies will become foreign companies, more American jobs will be relocated overseas, and there won’t be much of a corporate tax code left to reform in the future.