US Institute Recommends Low-Tax Policies To Congress

by Mike Godfrey, Tax-News.com, Washington

13 March 2003

In its 'Handbook for The 108th Congress', Washington's Cato Institute has outlined a series of recommendations for legislators. Key goals are:

• protect American fiscal sovereignty from foreign tax harmonization initiatives;
• require the withdrawal of the proposed IRS regulation that would mandate the reporting of foreign investors’ interest earned in the United States;
• oppose anti-competitive legislation that would restrict companies from reincorporating abroad; and
• pursue fundamental tax reform, including substantially cutting the high federal corporate income tax rate and adopting a territorial tax system.

With more open international borders, says the Institute, it is easier for individuals and businesses to avoid high-tax countries, which makes it more difficult for
governments to enforce oppressive tax burdens, and means that US policymakers need to exercise budget discipline and reduce tax rates in order to attract and
retain investment.

Inreased international competition, says Cato, means that businesses and investors can quickly respond to differences in capital taxes by reallocating mobile
capital income to lower-tax countries. That phenomenon occurs, for example, when U.S. companies consider moving their headquarters abroad to escape from the high U.S. corporate income tax rate and the complex 'worldwide' tax system imposed by the federal government.

The Institute points out that the average top individual income tax rate for members of the OECD fell from 55% in 1986 to 41% by 2000, and the average top corporate tax rate for members fell from 41% in 1986 to 32% by 2000. However, says the Handbook, tax competition has not yet reduced overall tax burdens because governments have taken heavy-handed measures to try to protect their tax bases. Such measures have included enactment of complex tax rules on foreign business income, efforts to limit tax competition through international pressure on low-tax nations, attacks on financial privacy, and protectionist legislation to restrict companies and taxpayers from relocating in more attractive tax jurisdictions.

The Handbook also criticises international efforts to create high-taxing cartels such as the United Nations proposal for an International Tax Organisation (ITO) as being anti-competitive.

Congress needs to oppose such anticompetitive measures, says Cato, because they undermine US economic strength.

Regarding the proposed IRS regulation to provide information about bank deposit interest payment to the home countries of depositors, the Institute notes that the regulation is designed, not to help the US government collect taxes, but to help foreign governments collect their taxes. The IRS has not completed a required cost/benefit analysis of the proposal. Such as analysis, says Cato, would probably find that the regulation would have a damaging effect on the economy as foreign investors withdrew funds from US banks. Figures from the US Department of Commerce show that the market value of private foreign investment in the United
States at the end of 2000 was about $9 trillion, with about $1.8 trillion held in bank deposits that would be vulnerable to flowing out of the country if the regulation was imposed.

On the subject of 'corporate inversion', the Handbook records that a 2002 US Treasury report recognizes that inversions raise broad issues of business tax burdens and calls for a comprehensive re-examination of U.S. international tax rules. Yet, rather than tackle the underlying problems of an uncompetitive corporate income tax, says the Handbook, many members of Congress are trying to hinder competitive relocations with laws that represent narrow-minded fiscal protectionism. The
tax savings that US firms gain by incorporating abroad, says Cato, are one measure of the excessive US business tax burden.

The recent rise in corporate inversions, says the Handbook, is a warning that the US corporate tax regime has become dangerously uncompetitive. At 40% (federal plus the state average), the US corporate income tax rate is the fourth highest in the 30-country OECD.

A substantial cut in the corporate tax rate, recommends Cato, would greatly reduce the inversion problem and other corporate tax avoidance problems that have
concerned policymakers, concluding that: 'In a global economy with 60,000 multinational corporations and trillions of dollars of investment funds searching for good returns, the high US corporate tax rate is not sustainable. Unless the United States substantially cuts its tax rates, wasteful tax avoidance will increase, complex and uncompetitive legislative responses will ensue, and the performance of the US economic engine will suffer.'

Recommended