Legislating can be so much more challenging than it seems during an election campaign. That’s becoming increasingly clear about Republican promises to repeal and replace Obamacare. And it’s about to become clearer on corporate tax reform.
Tax reform is a relatively easy concept: Most people favor lowering the tax rate and closing loopholes. The difficulty is in the details.
Consider the proposal now before the House of Representatives. It includes a reduction in the corporate tax rate; a one-time lower tax on profits accumulated abroad; an end to the tax deductibility of interest expense, coupled with immediate expensing of investments; and a border-adjustment system that would impose the corporate tax on imports but not exports.
The plan has several potentially desirable attributes. It would, for example, effectively eliminate the incentive for companies to shift profits abroad. However, the plan as a whole also has little chance of being enacted into law. Here’s why not.
The first two components of the House plan are popular and are likely to be enacted in some form: a cut in the corporate rate and a reduced one-time tax on profits accumulated abroad. The latter will likely take the form of “deemed repatriation,” in which the tax is imposed on foreign profits to date, regardless of whether they are repatriated to the U.S. Then any subsequent repatriations of those funds would be free of tax. Among the details that need to be worked out are the tax rate (probably 7-15 percent), whether the tax can be paid over time or must be paid all at once, and how to treat foreign taxes already paid. Such details are the bread and butter of legislative negotiations.