A Tax Deal That Fixes U.S. Roads?
Democrats and Republicans might get what they want.
Bloomberg, May 27, 2015
My wife leaves for work earlier than I do, giving her first choice of which car to drive. She has a longer drive than my three-minute jaunt to the train station, so I don’t mind. That often means I get the rear-wheel drive convertible in the snowy winter months, and the all-wheel drive Jeep in the summer.
But recently she keeps taking the bouncy Orange Crush Rubicon. The reason? The broken roads and potholes make the tight suspension of the BMW a horror to drive, despite the fair-weather retractable hardtop.
I was thinking about this as we kick off a new federal budget season. About this time, I usually lament the state of U.S. infrastructure, the highway-fund gas tax stuck in the early 1990s and other assorted indignities (see this, this, this and this). The people who live in civilized nations shouldn’t have to face this sort of failure of basic government.
And yet this year a few things are giving me a small measure of hope that we could see an uptick in infrastructure funding:
• States such as Utah have been raising local gas taxes to pay for infrastructure needs;
• A major White House push to make infrastructure a priority.
There is something unusual in that last bullet point, one that might make it possible to make headway. The clever twist is that President Barack Obama has taken boosting infrastructure spending — a favorite policy of Democrats — and tied it to a favorite policy of Republicans — reforming corporate taxes. Thus, this opening bid has generated some interest from both sides of the aisle.
More than $2 trillion of overseas corporate profits are stashed away in overseas accounts. Audit Analytics notes that these “indefinitely reinvested foreign earnings” have more than doubled since 2008 (see also this, this and this).
In response to this cash hoard, the president wants a one-time 14 percent tax on these accounts, with the revenue earmarked for infrastructure projects, and to allow the funds to be repatriated to the U.S.
The devil is always in the details, so let’s look more closely at them: The proposed six-year, $478 billion infrastructure upgrade to highways, bridges, and public transit in the U.S. would also replenishthe Highway Trust Fund. Companies could reinvest repatriated funds in the U.S. without paying any additional tax (aside from the one-time 14 percent levy). For foreign profits earned in the future, the minimum tax would be 19 percent.
Compare that with the current structure. U.S.-based multinational corporations are taxed at a 35 percent rate on worldwide income. Of course, no one pays that rate. Between inversion deals and those companies that pay no taxes at all, 35 percent is at best a nominal rate. Studies have shown that the effective corporate tax rate is something on the order of 12.6 percent.
Currently, taxes don’t have to be paid on overseas earnings until they are repatriated or paid in a dividend. At least, I think that is what the rules are; the tax code is beyond complicated, and I have precisely zero expertise in such things. But overseas taxes can be deferred indefinitely so long as the earnings are kept abroad. Yet, keeping the money abroad isn’t always advantageous if there are domestic investment opportunities.
The White House proposal is a good start to the debate about taxes. The U.S.’s infrastructure needs are large and growing. The country is way behind Japan, China, Germany and Switzerland. But before we can even think about trying to catch up with those nations, we need to do the desperately needed basic road and bridge maintenance.
Corporate tax reform can also be a positive, so long as the lobbyists don’t pry too many giveaways from their friends and future revolving-door contestants in Congress.
I don’t want to get ahead of myself, but maybe we have a good old fashioned political horse trade: Corporate tax reform for infrastructure repairs. Both are long overdue.
Originally published at: A Tax Deal That Fixes U.S. Roads?