Legislative Update Tax Reform—A Work in Progress

by BakerHostetler

With high tax rates and a worldwide (as opposed to territorial) system of taxation, U.S. corporate tax laws encourage new multinational corporations to organize outside the U.S. and encourage existing U.S. corporations to "elect" a territorial system by being acquired by a foreign-based multinational or moving their headquarters outside of the U.S. (generally in taxable transactions these days, which has slowed, but not stopped, such economically-compelled movements). If our corporate tax system is not overhauled soon -- by lowering rates, moving toward a territorial system or both -- more of our U.S.-based multinational corporations will be acquired by foreign parent companies, will relocate abroad or continue to plan for most of their growth to occur outside of the U.S. As a result, major decisions about such items as where to produce goods, perform services or conduct research and development will be made by boards of directors in foreign lands, and leaving our children to work for U.S. subsidiaries of multinational corporations headquartered abroad, rather than for multinational corporations headquartered in the U.S. If Congress did nothing more than move to a territorial system, the playing field for U.S. corporations would be leveled in the sense that all corporations doing business in the U.S. would be subject to the same tax rate (high, low or medium) on all of their U.S.-sourced income and activity. In such a case, U.S. corporations would not be penalized by being subjected to U.S. taxes (even if deferred) on activities abroad. If Congress lowered the highest corporate tax rate to 25 percent or less, corporations would have an economic incentive to locate more of their assets and income-producing activity in the U.S. and less abroad.

Last year at this time, we described the long-term outlook for comprehensive tax reform as depending on the development of a bipartisan agreement on the mix of spending cuts and revenues necessary to reduce the deficit. With recent changes to the Bush-era individual tax rates and deductions setting the stage for renewed interest in overall fundamental tax reform, the House Committee on Ways and Means and the Senate Finance Committee are stepping up their levels of activity. On May 9, the two committees teamed up to launch TaxReform.gov, a new website "dedicated to obtaining input from the American public on tax reform." "Max & Dave @simplertaxes" -- Chairmen Max Baucus (D-MT) and Dave Camp (R-MI) of Senate Finance and Ways and Means, respectively, have been tweeting multiple times a day since May 8 about their tax reform efforts ("#Taxreform will improve the lives of Americans, boost the economy and create jobs") and how bad the Tax Code is. One may wonder, if those tweets are true (and who could argue with such tweets?) why the Code has been allowed to languish in such a state of disrepair.


Mr. Camp has taken the lead as the GOP's voice on tax reform and announced that he intends to move a tax reform bill through his committee by the end of 2013. Under Mr. Camp's relatively transparent efforts, Ways and Means has held more than 20 hearings on tax reform, and hearings keep popping up on the calendar. Ways and Means has issued full discussion drafts, including legislative language, on international tax reform, financial products and small business proposals. Eleven subject matter working groups, each with a Republican Chair and a Democratic Vice Chair, have been organized, covering the key substantive and economic areas of the Code. Many industry groups are focusing on these efforts. More than 1,300 public comments have been received and posted on Ways and Means website, many of which were summarized in a 560-page pamphlet issued by the Joint Committee on Taxation on May 6. Although both parties are involved at the macro level, the effort is strongly directed and managed by Mr. Camp.

The Ways and Means budgetary approach expects to attain revenue neutrality overall, to be achieved through very rough revenue neutrality in each of the three areas of international, domestic corporate and business, and individual taxes. This was not the outcome in 1986, when overall corporate tax increases funded overall individual tax decreases. Note that the 2012 effort to pare down the list of tax expenditure "extenders" had minimal success, and Mr. Camp has since studiously avoided triggering a public debate on eliminating tax expenditures.


Senate Finance Chairman Baucus has said that he wants to pass a bipartisan bill out of his committee. That will be a challenge to accomplish by the end of 2013. Committee members have been holding private weekly meetings based on publicly issued bipartisan staff papers on tax reform options and intend to continue sounding out the members in this fashion. Seven papers have been issued thus far, each covering particular substantive areas. It is not clear how many more of these papers will be released, although the effort has been picking up momentum. In fact, Mr. Baucus will be challenged to produce a bipartisan tax reform plan at all, since he wants to use some new revenues to reduce the deficit and Republicans want to reduce the deficit only through spending cuts.


Tax reform can be difficult for a President who appears to believe that free trade, a territorial tax system and low corporate tax rates are good for the long-term success of American businesses but who also derives significant support from constituent groups that are worried about the short-term effects of implementing such policies. The Administration's strategy for tax reform over the past four years is indicative of these practical realities. The President's 2014 budget tax proposals, mostly repeating prior Obama Administration proposals, suggest that U.S. tax reform should be incremental and also should raise a net amount of $890 billion over 10 years -- with roughly two-thirds of that net coming from individuals (although some commentators believe all would ultimately come from individuals).


So what is the outlook for comprehensive tax reform? The fundamental issue that divides the two political parties is whether or not tax reform should raise new revenues. A critical subsidiary question, politically loaded, is whether elimination of tax expenditures (running at $1.3 trillion per year) would be considered a "tax increase" or a "spending cut." There appears to be a bitter political dividing line on these issues. Concerns about corporations, corporate intellectual property and corporate jobs leaving the U.S. (or U.S. corporations setting their growth priorities outside of the U.S.) seem to be subsidiary issues, although many economists and policymakers believe they should be driving reform.

It may be too early to tell if the effects of the sequestration will change the political calculus regarding raising revenue or cutting spending. There have been recent rumblings that the GOP would attempt to tie an agreement to engage in tax reform to an increase in the Federal debt ceiling. Treasury has announced that, due to the budgetary savings from sequestration and increased revenues from new taxes and economic growth, the need to deal with the debt ceiling may not be pressing until sometime after Labor Day.

Two wild-card factors in the tax reform mix are the announced retirement of Mr. Baucus and the requirement that Mr. Camp step down from his committee chairmanship, both at the end of 2014. Their impending step downs could motivate these men to push tax reform to a successful conclusion by 2014 but also may decrease their clout, making it more difficult for them to bring legislators supporting varied constituencies to the table. The most likely outcome of this activity will be progress in discussions that set the direction for future fundamental tax reform but low expectations for actual results before the mid-term elections or beyond.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BakerHostetler | Attorney Advertising

Written by:


BakerHostetler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.