Introduction – Territorial vs. Worldwide Taxation or Global Taxation – It’s becoming topical!
July 15, 2012 – the Financial Times ran a front page article called “China eases taxes for foreign companies” The article included the following:
China will cut taxes on the profits that foreign companies take out of the country by up to 50 per cent after rules on withholding taxes were relaxed to encourage more overseas investment.
The move will also apply to dividends paid by Chinese listed companies to foreign shareholders through the Qualified Foreign Institutional Investor scheme . In both cases, the lower tax rates will apply only to companies and shareholders based in countries, such as the UK, that have double taxation agreements with China.
The changes could save companies billions of dollars worth of tax payments, which might initially lead them to repatriate more profits, but ultimately should provide incentives for more investments, according to experts at KPMG. US companies, however, cannot benefit as they are taxed on a global basis by US authorities.
The damaging effect of “Worldwide” or “Global Taxation” on American companies
August 7, 2012 – Possible Congressional response
U.S. tax policy is clearly hurting the competitiveness of U.S. companies doing business outside the United States. Some Congressmen in Washington are beginning to wake up to this reality. Although the following bill is likely “political grandstanding” it does identify issues that are sure to dominate the upcoming election.
August 11, 2012 – Speaking of the election – Romney announces that Congressman Paul Ryan, who is a proponent of “territorial taxation” will be his running mate.
Some key provisions of Bill 6169 — Pathway to Job Creation through a Simpler, Fairer Tax Code Act of 2012
This proposed law describes some of the reasons why Tax Reform is certain to play a major role in the upcoming election. The highlights include:
- (13) As of April 1, 2012, the United States achieved the dubious distinction of having the highest corporate tax rate (39.2 percent for Federal and State combined) in the developed world.
- (14) The United States corporate tax rate is more than 50 percent higher than the average rate of member states of the Organization for Economic Cooperation and Development (OECD)–a factor that discourages employers and investors from locating jobs and investments in the United States.
- (15) The United States has become an outlier in that it still uses a `worldwide’ system of taxation–one that has not been substantially reformed in 50 years, when the United States accounted for nearly half of global economic output and had no serious competitors around the world.
- (16) The combination of the highest corporate tax rate with an antiquated `worldwide’ system subjects American companies to double taxation when they attempt to compete with foreign companies in overseas markets and then reinvest their earnings in the United States.
- (17) The Nation’s outdated tax code has contributed to the fact that the world’s largest companies are more likely to be headquartered overseas today than at any point in the last 50 years: In 1960, 17 of the world’s 20 largest companies were based in the United States; by 2010, that number sank to a mere six out of 20.
- (18) The United States has one of the highest levels of taxation on capital–taxing it once at the corporate level and then again at the individual level–with integrated tax rates on certain investment income already reaching roughly 50 percent (and scheduled to reach nearly 70 percent in 2013).
You will note that this describes “worldwide taxation” as a serious problem.
But wait! What is true of U.S. corporations is also true of U.S. citizens! U.S. citizens abroad are also victims of “worldwide” or “citizenship-based” taxation
“Worldwide taxation” is another way (at least in terms of the taxation of individuals) of describing “citizenship-based taxation”. The basic principle of U.S. tax law is that:
U.S. citizens (even if they live outside the U.S.) and U.S. companies must pay tax on income earned outside the United States.
This hurts U.S. citizens abroad, U.S. companies, other countries and even the United States itself. Yet, the U.S. persists in the insanity of citizenship-based taxation. Territorial taxation, which is the rule in every country except the U.S., is a system that means that income is taxed by and only by the government in the location it is earned.
The law which requires U.S. Persons to submit worldwide income to US taxation must be changed. It is unfair, it makes no sense, and it has a chilling effect on commerce, jobs creation, and free trade. Perhaps more importantly, our world image has suffered enough over the last few decades. People over the world who have been on the fence about whether America has lost its mind can only be convinced with this new compliance initiative which removes all doubt.
Citizenship-based taxation is a great injustice!
But, who cares about U.S. citizens abroad?
True enough, but the truth is that “worldwide” or “citizenship-based” taxation is also harmful to the U.S. “Homeland” in general and “Homelanders” in particular. Yes it’s true!
August 13, 2012 – Grover Norquist appeared on C-Span in show called: “The roles of taxes in national security”. Fascinating title. Is he saying that:
As goes tax policy, so goes the (“Form”) nation?
Accountants understand numbers and how to compute tax liability.
Lawyers understand how to counsel clients through a myriad of options.
Grover Norquist understands the role that tax policy plays in domestic policy, foreign policy and how taxes can build or destroy empires.
Could the history of the United States be written by focusing on its tax policies? Part of the reasons for the American Revolution were rooted in the tax policies of Great Britain. Some believe that those policies are not different from what the U.S. is doing today. For those who doubt this, you might read the full text of the Declaration of Independence. At least one commentator has suggested that historians will point to citizenship-based taxation as an important reason for the end of the American empire.
I highly recommend that you invest the time to watch this. At a minimum it underscores the obvious. Tax policy is about much more than raising revenue. It includes a five minute clip (starting at the 13 minute mark and ending at the 18 minute mark) that is particularly interesting and relevant to the issue of citizenship-based taxation. Mr. Norquist does NOT use the term “citizenship-based taxation”. He uses the term “worldwide tax” to refer to citizenship-based taxation. What is truly significant is that he talks about the issue from the perspective of both U.S. citizens abroad and U.S. companies. In relation to U.S. companies he carries the discussion beyond the issue of taxation per se, but considers some effects. These effects include the projection of both (to use his words) “hard power” and “soft power”.
On the issue of “Worldwide taxation” (citizenship-based taxation) here is the Readers Digest Version:
“Worldwide Taxation” (Citizenship-based taxation) – Individuals:
Mr. Norquist notes that U.S. citizens abroad are ambassadors for the U.S. As such U.S. citizens abroad have enormous influence over how people perceive the U.S. Since 2011 the Obama administration and IRS has been carrying on a war against U.S. citizens abroad. To the extent that these U.S. citizens are dual citizens, the treatment of U.S. citizens abroad will likely become a diplomatic issue.
Mr. Norquist notes that citizenship-based taxation makes U.S. persons to expensive to employ. He gives the example of it being harder for U.S. citizens outside the U.S. to be employed – a Saudi company would find it less expensive to employ a German engineer than a U.S. engineer (and this doesn’t even include things like the FBAR issue).
Worldwide Taxation – Companies:
Mr. Norquist notes the problem of double taxation and notes that it makes U.S. companies reluctant to “repatriate earnings” (bring earnings back to the Homeland”);
Effects of Worldwide Taxation on U.S. Companies – Two interesting points:
1. There are strong incentives for U.S. companies to NOT “repatriate” company earnings.
To allow U.S. companies to repatriate their foreign earnings (that have already been taxed in the foreign country) would mean all that money could be invested in the U.S. economy. I repeat, that is money that could be invested directly into the U.S. economy. Now that would be honest stimulant! Wouldn’t that be a great thing? As it stands now, it makes more sense for those profits earned in foreign countries to be reinvested there.
2. The fact of being a U.S. company makes the company worth less than it would be if it had no U.S. connection
Worldwide taxation means that all U.S. companies are worth less than than if the same company were NOT a U.S. company? Why? Simple any company that is subject to double taxation has less economic value than a company that only pays taxes in the place it earns the money. In addition, the extensive reporting requirements are another tax on productivity.
How to Unlock the Value of a U.S. company?
It’s simple. Just arrange for the company to cease being a U.S. company. That will make it instantly more valuable. Mr. Norquist uses the example of a well known U.S. beer company being bought by a non-U.S. company. The U.S. tax and regulatory environment has seriously damaged the value of all U.S. companies doing business abroad.
Non-U.S. companies – can a U.S. connection erode share value?
This is an interesting question. The U.S. has the most complex, expensive and burdensome regulatory environment in the world (not to mention the highest nominal corporate tax rate in the world). Is this something to be proud of? “Form Nation” can think what it wants, but at the end of the day all free people and companies want to avoid expensive regulation. What are the pros and cons of listing a company on a U.S. exchange?
Interestingly, today’s Toronto Star ran an article discussing a Chinese company that wants to get itself off the NYSE. The reference to the article was posted at the Isaac Brock Society. An interesting comment in the article is:
“Some Chinese companies say they are pulling out of U.S. markets because a low share price fails to reflect the strength of their business. Withdrawing also eliminates the cost of complying with American financial reporting rules.”
Interesting. To what extent is the low share price the result of being listed on a U.S. exchange? We will never know for sure. But, we do know how costly compliance with U.S. laws is. We also know that costs lower profits and that lower profits lower share prices.
Bottom Line: When valuing U.S. companies and U.S. persons, It’s time to recognize the “IRS Discount”
U.S. tax and regulatory laws mean that, any U.S. business which does business inside the United States, is valued at what I would call: the IRS discount. It comes with compliance costs that exist in no other country. Why would anybody want to set up a business in the United States? Seems like it just can’t be worth it.
But, the “IRS discount” is not restricted to businesses. If you have read this far, you probably are a U.S. person who feels disabled by U.S. citizenship and realizes the “U.S. citizenship is a problem to be solved”. U.S. citizens also come with an “IRS Discount”. FBAR, FATCA and the like have made U.S. citizens undesirables.
Question: How does one “unlock” the value of a U.S. citizen abroad?
Question: What should you encourage if you care about the future of the United States?
Here is the text of Bill 6169 in its entirety. Although this will never make it into law, it may define some of the terms of the debate.
HR 6169 RH
House Calendar No. 153112th CONGRESS2d Session H. R. 6169[Report No. 112-629]To provide for expedited consideration of a bill providing for comprehensive tax reform.
IN THE HOUSE OF REPRESENTATIVESJuly 24, 2012Mr. DREIER (for himself, Mr. CAMP, Mr. SESSIONS, Mr. BISHOP of Utah, Mr. WOODALL, Mr. NUGENT, Mr. SCOTT of South Carolina, Mr. WEBSTER, Mr. ROSKAM, Mr. BRADY of Texas, Mr. BERG, Mr. REED, Mr. SMITH of Nebraska, Mr. SCHOCK, Mr. DAVIS of Kentucky, Ms. JENKINS, Mrs. BLACK, Mr. HERGER, Mr. GERLACH, Mr. SAM JOHNSON of Texas, Mr. BOUSTANY, Mr. TIBERI, and Mr. MARCHANT) introduced the following bill; which was referred to the Committee on Rules
July 30, 2012Additional sponsor: Mr. GRAVES of Missouri
July 30, 2012Referred to the House Calendar and ordered to be printed
A BILLTo provide for expedited consideration of a bill providing for comprehensive tax reform.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the `Pathway to Job Creation through a Simpler, Fairer Tax Code Act of 2012′.
SEC. 2. FINDINGS AND PURPOSES.
(a) Findings- Congress finds that the following problems exist with the Internal Revenue Code of 1986 (in this section referred to as the `tax code’):
(1) The tax code is unfair, containing hundreds of provisions that only benefit certain special interests, resulting in a system of winners and losers.
(2) The tax code violates the fundamental principle of equal justice by subjecting families in similar circumstances to significantly different tax bills.
(3)(A) Many tax preferences, sometimes referred to as `tax expenditures,’ are similar to government spending–instead of markets directing economic resources to their most efficient uses, the Government directs resources to other uses, creating a drag on economic growth and job creation.
(B) The exclusions, deductions, credits, and special rules that make up such tax expenditures amount to over $1 trillion per year, nearly matching the total amount of annual revenue that is generated from the income tax itself.
(C) In some cases, tax subsidies can literally take the form of spending through the tax code, redistributing taxes paid by some Americans to individuals and businesses who do not pay any income taxes at all.
(4) The failure to adopt a permanent tax code with stable statutory tax policy has created greater economic uncertainty. Tax rates have been scheduled to increase sharply in 3 of the last 5 years, requiring the enactment of repeated temporary extensions. Additionally, approximately 70 other, more targeted tax provisions expired in 2011 or are currently scheduled to expire by the end of 2012.
(5) Since 2001, there have been nearly 4,500 changes made to the tax code, averaging more than one each day over the past decade.
(6) The tax code’s complexity leads nearly nine out of ten families either to hire tax preparers (60 percent) or purchase software (29 percent) to file their taxes, while 71 percent of unincorporated businesses are forced to pay someone else to prepare their taxes.
(7) The cost of complying with the tax code is too burdensome, forcing individuals, families, and employers to spend over six billion hours and over $160 billion per year trying to comply with the law and pay the actual tax owed.
(8) Compliance with the current tax code is a financial hardship for employers that falls disproportionately on small businesses, which spend an average of $74 per hour on tax-related compliance, making it the most expensive paperwork burden they encounter.
(9) Small businesses have been responsible for two-thirds of the jobs created in the United States over the past 15 years, and approximately half of small-business profits are taxed at the current top 2 individual rates.
(10) The historic range for tax revenues collected by the Federal government has averaged 18 to 19 percent of Gross Domestic Product (GDP), but will rise to 21.2 percent of GDP under current law–a level never reached, let alone sustained, in the Nation’s history.
(11) The current tax code is highly punitive, with a top Federal individual income tax rate of 35 percent (which is set to climb to over 40 percent in 2013 when taking into account certain hidden rates), meaning some Americans could face a combined local, State and Federal tax rate of 50 percent.
(12) The tax code contains harmful provisions, such as the Alternative Minimum Tax (AMT), which was initially designed to affect only the very highest-income taxpayers but now threatens more than 30 million middle-class households because of a flawed design.
(13) As of April 1, 2012, the United States achieved the dubious distinction of having the highest corporate tax rate (39.2 percent for Federal and State combined) in the developed world.
(14) The United States corporate tax rate is more than 50 percent higher than the average rate of member states of the Organization for Economic Cooperation and Development (OECD)–a factor that discourages employers and investors from locating jobs and investments in the United States.
(15) The United States has become an outlier in that it still uses a `worldwide’ system of taxation–one that has not been substantially reformed in 50 years, when the United States accounted for nearly half of global economic output and had no serious competitors around the world.
(16) The combination of the highest corporate tax rate with an antiquated `worldwide’ system subjects American companies to double taxation when they attempt to compete with foreign companies in overseas markets and then reinvest their earnings in the United States.
(17) The Nation’s outdated tax code has contributed to the fact that the world’s largest companies are more likely to be headquartered overseas today than at any point in the last 50 years: In 1960, 17 of the world’s 20 largest companies were based in the United States; by 2010, that number sank to a mere six out of 20.
(18) The United States has one of the highest levels of taxation on capital–taxing it once at the corporate level and then again at the individual level–with integrated tax rates on certain investment income already reaching roughly 50 percent (and scheduled to reach nearly 70 percent in 2013).
(19) The United States’ overall taxation of capital is higher than all but four of the 38 countries that make up the OECD and the BRIC (Brazil, Russia, India and China).
(b) Purposes- It is the purpose of this Act to provide for enactment of comprehensive tax reform in 2013 that–
(1) protects taxpayers by creating a fairer, simpler, flatter tax code for individuals and families by–
(A) lowering marginal tax rates and broadening the tax base;
(B) eliminating special interest loopholes;
(C) reducing complexity in the tax code, making tax compliance easier and less costly;
(D) repealing the Alternative Minimum Tax;
(E) maintaining modern levels of progressivity so as to not overburden any one group or further erode the tax base;
(F) making it easier for Americans to save; and
(G) reducing the tax burdens imposed on married couples and families;
(2) is comprehensive (addressing both individual and corporate rates), so as to have the maximum economic impact by benefitting employers and their employees regardless of how a business is structured;
(3) results in tax revenue consistent with historical norms;
(4) spurs greater investment, innovation and job creation, and therefore increases economic activity and the size of the economy on a dynamic basis as compared to the current tax code; and
(5) makes American workers and businesses more competitive by–
(A) creating a stable, predictable tax code under which families and employers are best able to plan for the future;
(B) keeping taxes on small businesses low;
(C) reducing America’s corporate tax rate, which is currently the highest in the industrialized world;
(D) maintaining a level of parity between individual and corporate rates to reduce economic distortions;
(E) promoting innovation in the United States;
(F) transitioning to a globally competitive territorial tax system;
(G) minimizing the double taxation of investment and capital; and
(H) reducing the impact of taxes on business decision-making to allow such decisions to be driven by their economic potential.
SEC. 3. EXPEDITED CONSIDERATION OF A MEASURE PROVIDING FOR COMPREHENSIVE TAX REFORM.
(a) Definition- For purposes of this section, the term `tax reform bill’ means a bill of the 113th Congress–
(1) introduced in the House of Representatives by the chair of the Committee on Ways and Means not later than April 30, 2013, or the first legislative day thereafter if the House is not in session on that day, the title of which is as follows: `A bill to provide for comprehensive tax reform.’; and
(2) which is the subject of a certification under subsection (b).
(b) Certification- The chair of the Joint Committee on Taxation shall notify the House and Senate in writing whenever the chair of the Joint Committee determines that an introduced bill described in subsection (a)(1) contains at least each of the following proposals:
(1) a consolidation of the current 6 individual income tax brackets into not more than two brackets of 10 and not more than 25 percent;
(2) a reduction in the corporate tax rate to not greater than 25 percent;
(3) a repeal of the Alternative Minimum Tax;
(4) a broadening of the tax base to maintain revenue between 18 and 19 percent of the economy; and
(5) a change from a `worldwide’ to a `territorial’ system of taxation.
(c) Expedited Consideration in the House of Representatives-
(1) Any committee of the House of Representatives to which the tax reform bill is referred shall report it to the House not later than 20 calendar days after the date of its introduction. If a committee fails to report the tax reform bill within that period, such committee shall be automatically discharged from further consideration of the bill.
(2) If the House has not otherwise proceeded to the consideration of the tax reform bill upon the expiration of 15 legislative days after the bill has been placed on the Union Calendar, it shall be in order for the Majority Leader or a designee (or, after the expiration of an additional 2 legislative days, any Member), to offer one motion that the House resolve into the Committee of the Whole House on the state of the Union for the consideration of the tax reform bill. The previous question shall be considered as ordered on the motion to its adoption without intervening motion except 20 minutes of debate equally divided and controlled by the proponent and an opponent. If such a motion is adopted, consideration shall proceed in accordance with paragraph (3). A motion to reconsider the vote by which the motion is disposed of shall not be in order.
(3) The first reading of the bill shall be dispensed with. General debate shall be confined to the bill and shall not exceed 4 hours, equally divided and controlled by the chair and ranking minority member of the Committee on Ways and Means. At the conclusion of general debate, the bill shall be read for amendment under the five-minute rule. Any committee amendment shall be considered as read. At the conclusion of consideration of the bill for amendment the Committee shall rise and report the bill to the House with such amendments as may have been adopted. The previous question shall be considered as ordered on the bill and amendments thereto to final passage without intervening motion except one motion to recommit with or without instructions. A motion to reconsider the vote on passage of the bill shall not be in order.
(d) Expedited Consideration in the Senate-
(1) COMMITTEE CONSIDERATION- A tax reform bill, as defined in subsection (a), received in the Senate shall be referred to the Committee on Finance. The Committee shall report the bill not later than 15 calendar days after receipt of the bill in the Senate. If the Committee fails to report the bill within that period, that committee shall be discharged from consideration of the bill, and the bill shall be placed on the calendar.
(2) MOTION TO PROCEED- Notwithstanding rule XXII of the Standing Rules of the Senate, it is in order, not later than 2 days of session after the date on which the tax reform bill is reported or discharged from committee, for the majority leader of the Senate or the majority leader’s designee to move to proceed to the consideration of the tax reform bill. It shall also be in order for any Member of the Senate to move to proceed to the consideration of the tax reform bill at any time after the conclusion of such 2-day period. A motion to proceed is in order even though a previous motion to the same effect has been disagreed to. All points of order against the motion to proceed to the tax reform bill are waived. The motion to proceed is not debatable. The motion is not subject to a motion to postpone.
(3) CONSIDERATION- No motion to recommit shall be in order and debate on any motion or appeal shall be limited to one hour, to be divided in the usual form.
(4) AMENDMENTS- All amendments must be relevant to the bill and debate on any amendment shall be limited to 2 hours to be equally divided in the usual form between the opponents and proponents of the amendment. Debate on any amendment to an amendment, debatable motion, or appeal shall be limited to 1 hour to be equally divided in the usual form between the opponents and proponents of the amendment.
(5) VOTE ON PASSAGE- If the Senate has proceeded to the bill, and following the conclusion of all debate, the Senate shall proceed to a vote on passage of the bill as amended, if amended.
(e) Conference in the House- If the House receives a message that the Senate has passed the tax reform bill with an amendment or amendments, it shall be in order for the chair of the Committee on Ways and Means or a designee, without intervention of any point of order, to offer any motion specified in clause 1 of rule XXII.
(f) Conference in the Senate- If the Senate receives from the House a message to accompany the tax reform bill, as defined in subsection (a), then no later than two session days after its receipt–
(1) the Chair shall lay the message before the Senate;
(2) the motion to insist on the Senate amendment or disagree to the House amendment or amendments to the Senate amendment, the request for a conference with the House or the motion to agree to the request of the House for a conference, and the motion to authorize the Chair to appoint conferees on the part of the Senate shall be agreed to; and
(3) the Chair shall then be authorized to appoint conferees on the part of the Senate without intervening motion, with a ratio agreed to with the concurrence of both leaders.
(g) Rulemaking- This section is enacted by the Congress as an exercise of the rulemaking power of the House of Representatives and Senate, respectively, and as such is deemed a part of the rules of each House, respectively, or of that House to which they specifically apply, and such procedures supersede other rules only to the extent that they are inconsistent with such rules; and with full recognition of the constitutional right of either House to change the rules (so far as relating to the procedures of that House) at any time, in the same manner, and to the same extent as any other rule of that House.
House Calendar No. 153
112th CONGRESS2d SessionH. R. 6169[Report No. 112-629]A BILLTo provide for expedited consideration of a bill providing for comprehensive tax reform.