Wyden Lays Out Principles for Tax Reform
In Speech at the Tax Policy Center, Top Finance Democrat Discusses International, Energy, Education, Retirement, Business Taxes
WASHINGTON – Senate Finance Committee Ranking Member Ron Wyden, D-Ore., today outlined his principles for tax reform in a speech to the Tax Policy Center at the Brookings Institution. Key excerpts can be found below, followed by the full text of Wyden’s remarks.
On Republican Presidential Candidate Tax Proposals:
“If you hop online today and read the details of the tax plans that have been released by the Republican presidential candidates, you’ll see unbelievably regressive proposals with astronomical price tags of trillions and trillions of dollars. Here’s my take on where these campaign proposals are going: I have a better chance of playing in the NBA than these multi-trillion dollar tax giveaways have of passing the Senate.”
On International Tax Reform:
“Our international tax system now traps capital overseas instead of drawing it back home. Against all common sense, it creates unjustifiable tax windfalls for companies that move to the Isle of Who Knows Where, produce and manufacture abroad, and sell their products back into the U.S. And the biggest danger of the international tax system, in my view, is that it drives bold entrepreneurs with transformative ideas away from the U.S. I fear that with the status quo, our best and brightest are more likely to build the next Silicon Valley between Oxford and Cambridge than between Eugene and Corvallis.
“I have three main principles for international tax reform. First, our corporate tax rate must become competitive again. Second, the tax code should attract investment to the U.S. and reward those who create red-white-and-blue jobs – not those who game the system. And third, international tax reform absolutely must yield real revenue for infrastructure investments here in the United States.”
“A code that eliminates barriers to investment and helps the U.S. compete will strengthen our economy and create good-paying jobs. And as long as the rules are tough and there’s revenue on the table for infrastructure, this is a proposal I believe can bring the parties together.”
On Inversions and Tax Games:
“There’s no doubt that election-year politics make a major tax overhaul of any kind extremely unlikely, but Congress can’t afford to wait until 2017 to address the immediate challenges on the international front.
“For example, it’s my view that the foreign company on one side of an inversion ought to own much more than 20 percent of the American firm it’s acquiring. Congress should increase that requirement to 50 percent. In addition, it should not be so easy for inverting companies to bend the rules around transfer pricing, or to strip the value and earnings out of an American firm by loading it up with debt – which American taxpayers then have to subsidize. Our tax laws also ought to be more clear-eyed and tougher on what some call “spinversions,” “hopscotch loans,” and other games that enable merging firms to head for the exits without paying their fair share. I am putting together a proposal that will combine many of these ideas into one package to crack down on inversions and tax games to preserve our tax base for broader reform.”
Wyden’s full remarks, as prepared for delivery:
Economic Anger and Tax Fairness
The presidential election is now only a little more than eight months away, and when it comes to the home front, there’s an underlying anger among millions of Americans who feel disconnected from this country’s economic engine. That’s the theme dominating the campaigns.
Anger at the disappearance of good-paying jobs in industries that were once pillars of the American economy. Anger at how the costs of child care, housing, and college are skyrocketing while many hard-working Americans haven’t gotten a raise in years, or even decades. Anger at having to stretch every paycheck, and never having a chance to build a nest egg. And when it comes to this country’s tax policies, there’s a lot to be angry about.
A Tale of Two Tax Codes
Today, what the U.S. has is a tale of two tax systems. There’s the involuntary system most Americans deal with. If you work the line at a factory or put in a 9-to-5 at a cubicle in an office building, your taxes come straight out of your paycheck once or twice a month. There are no special dodges, no clever strategies, no cutting corners to escape paying what you owe.
Then there’s a different tax system for the well-connected – one that’s been warped by high-priced accountants and lawyers at white-shoe firms. It has a full array of tax-dodging schemes with names like “wash sales,” “collars” and “swaps” and slippery definitions of capital gains and income. Under that special tax system, with the right advice, you can pay what you want, when you want.
So, building on a report I released last year on how tax pros game the system with sophisticated financial instruments, I’m working on legislation that goes after the issue head-on and fights inequality in our tax code. It’s all about ending this two-tiered system, creating greater parity between taxes on wages and wealth, and cleaning out the complicated web of rules and loopholes that is extraordinarily unfair to typical working taxpayers.
The spotlight of the presidential campaign has begun to shine on this unfair, overcomplicated system. It absolutely needs to change. And it’s important to remember that Ronald Reagan – nobody’s idea of a liberal – signed a law that equalized the tax treatment of income from wages and wealth.
But if you hop online today and read the details of the tax plans that have been released by the Republican presidential candidates, you’ll see unbelievably regressive proposals with astronomical price tags of trillions and trillions of dollars. Here’s my take on where these campaign proposals are going. I have a better chance of playing in the NBA than these multi-trillion dollar tax giveaways have of passing the Senate.
The tax code is an overgrown, infested mess. There are cobwebs of complexity woven into every one of its dark corners. That complexity, in my view, is what drives so much unfairness and inequality, and it slows our economy down. The answer isn’t to hand out trillions of dollars to people who don’t need the help, as the Republican presidential candidates have proposed. The answer is to clean up the tax code in a way that gives all Americans a chance to get ahead and strengthens the economy, and you have to start with radical tax simplification. By radically simplifying the tax system in key ways, policymakers can go a long way toward ending the unfair two-tiered system and addressing more of the code’s problems. Here’s where Congress should head.
Saving for Retirement and Paying for Education
I believe young parents just starting out shouldn’t have to spend days on end parsing the differences between the many types of retirement savings vehicles. I sponsored a bipartisan bill a few years ago to make the choice of how to save for retirement much simpler, and I continue develop ways to make it easier for working families to save. And I believe the parents of kids heading to college shouldn’t have to go through dozens of calculations to figure out which tax incentive delivers the most benefit. Now that the American Opportunity Tax Credit has been made permanent, Congress ought to take the next step to simplify our entire portfolio of education tax incentives to accomplish three things: help people save, cover tuition costs, and pay their loans.
Cleaning up Business Tax Rules
Of course, it’s not just the individual side of our tax code that’s too complex and unfair. There are enormous challenges to address with business taxes as well. For one, I believe that an entrepreneur’s ingenuity and sweat equity are much better spent growing her company than shuffling through paperwork to comply with arcane accounting rules. Starting and running a small business shouldn’t require an applied mathematics degree, and as those small firms mature and grow, they shouldn’t have to spend half the year or more working through the math on depreciation. So I’m developing a proposal that will simplify the system. Instead of 100 sets of depreciation rules, I want to get down to a handful that’s easy to work with, and businesses will be able to average out the useful life of their equipment instead of having to use a separate schedule for every item in their inventory.
Simplifying the Energy Tax Code
When it comes to energy, I believe our tax code should be centered on the goal of building a fair and affordable low-carbon economy. Today, however, the code has a complicated, uneven patchwork of more than 40 different tax breaks for various technologies – fossil and renewable. They’ve all got different rules and definitions. Some technologies get a lot of taxpayer investment, others get a little. Some breaks are permanent and others are temporary. So I’ve introduced legislation to go from 40 energy tax breaks down to three incentives based on common-sense goals: cleaner power, cleaner transportation, and greater energy efficiency. This approach would not only cut down the number of energy breaks but would also cut the cost of current energy tax incentives in half. That would be radically simpler and it would put the country on a road to a low-carbon future.
Helping the U.S. Compete and Creating American Jobs
There are also big challenges on international taxation. Today’s international tax system, if unchanged, will siphon much of the gas out of America’s economic engine and send it overseas. It needs to be replaced with a system that encourages Americans to innovate here and make things here, add value to them here, and sell them to the 95 percent of the world’s consumers who live outside the U.S.
Our international tax system now traps capital overseas instead of drawing it back home. Against all common sense, it creates unjustifiable tax windfalls for companies that move to the Isle of Who Knows Where, produce and manufacture abroad, and sell their products back into the U.S. And the biggest danger of the international tax system, in my view, is that it drives bold entrepreneurs with transformative ideas away from the U.S. I fear that with the status quo, our best and brightest are more likely to build the next Silicon Valley between Oxford and Cambridge than between Eugene and Corvallis.
Principles and Proposals for International Reform
I have three main principles for international tax reform. First, our corporate tax rate must become competitive again. Second, the tax code should attract investment to the U.S. and reward those who create red-white-and-blue jobs – not those who game the system. And third, international tax reform absolutely must yield real revenue for infrastructure investments here in the United States.
In my view, an international tax reform plan built around those principles is a territorial system without the gaming. The right set of anti-abuse rules can crack down on mind-numbing strategies like the “double Irish with a Dutch sandwich” and end the race to the bottom. A code that eliminates barriers to investment and helps the U.S. compete will strengthen our economy and create good-paying jobs. And as long as the rules are tough and there’s revenue on the table for infrastructure, this is a proposal I believe can bring the parties together.
For example, the Finance Committee’s bipartisan working group on international reform, which was led by Senators Schumer and Portman, agreed on this kind of basic framework. Chairman Hatch and I knew they’d be able to move the ball forward, which is why we asked them to lead the effort, and they made big progress.
Cracking down on Inversions and Gaming
With that said, there’s no doubt that election-year politics make a major tax overhaul of any kind extremely unlikely, but Congress can’t afford to wait until 2017 to address the immediate challenges on the international front.
It’s vital that Congress triage the inversion virus and the rampant tax gaming to defend against base erosion. You can’t ignore the way inversions and other M&A activities have infected the American economy just because it’s an election year.
With firms that have already inverted now gobbling up more American companies, there is a dangerous type of feedback loop developing. It threatens to winnow down our tax base more and more, and as that happens, it gets a lot harder for policy makers to develop fiscally responsible business tax reform that will deliver any kind of meaningful boost to our economy. Congress has to do something to address this emergent crisis, and there are a lot of ideas that deserve consideration.
For example, it’s my view that the foreign company on one side of an inversion ought to own much more than 20 percent of the American firm it’s acquiring. Congress should increase that requirement to 50 percent. In addition, it should not be so easy for inverting companies to bend the rules around transfer pricing, or to strip the value and earnings out of an American firm by loading it up with debt – which American taxpayers then have to subsidize. Our tax laws also ought to be more clear-eyed and tougher on what some call “spinversions,” “hopscotch loans,” and other games that enable merging firms to head for the exits without paying their fair share. I am putting together a proposal that will combine many of these ideas into one package to crack down on inversions and tax games to preserve our tax base for broader reform.
The fact is, the inversion virus has once again leapt from the back page of the business section to front-page news. People who see the headlines understand that it’s a symptom of a diseased tax code, and it’s a bad deal for taxpayers in Oregon and across the country. But an international reform plan that ends the gaming, invests in America’s crumbling infrastructure, attracts more investment, and creates red-white-and-blue jobs is one that I believe the American people can support.
Bipartisanship and Reasons for Optimism
I’m optimistic this can get done on a bipartisan basis. Hammering out the details and agreeing on the final numbers will not be easy, but I see an opportunity for what I call “principled bipartisanship” in the months ahead. My optimism comes from the fact that Democrats and Republicans joined together in December to pass a landmark tax-cut agreement that delivered on simplification and fairness. The parameters of that deal would have seemed like an absolute impossibility just a few years ago, but it worked out because of the approach members took to the negotiations. Equally important, in light of recent history, the end-of-year tax agreement proved that Congress doesn’t have to be speeding toward a fiscal cliff to reach a big bipartisan deal.
Sometimes when talks begin on Capitol Hill, members immediately go to the mat over dollar figures or baselines. This time around, my colleagues and I started the process focused on our principles before battling over specifics. My Republican colleagues pushed for certain business tax breaks to be made permanent – these are the stop-and-go tax incentives we all know as “extenders.” Democrats were on board with that proposition, because the uncertainty inherent in stop-and-go extenders is the wrong way to manage tax policy. But Democrats’ foremost principle was that the agreement had to be balanced: If Congress was going to lock in permanent business tax cuts, it had to lock in tax cuts for working families at the same time.
That’s how the agreement worked out – everyone left with their principles intact and major wins for the American people. It was the largest anti-poverty measure Congress has passed in decades, it simplified the system, and it was the biggest bipartisan tax deal since 2001 that was not driven by a legislative crisis.
So after a December that defied the tax policy odds, Congress has a ready-made blueprint for broader reform that clears out the cobwebs of complexity in our tax code. It’s my view that if you radically simplify the code, you go a long way to building a stronger economy and giving everybody a chance to get ahead, and I am eager to work with my colleagues, the Obama administration and the next President to see these reforms through.
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