The threat of businesses fleeing the U.S. has Republicans sounding like populists and Democrats like big business executives.
House Ways and Means Committee Chairman Kevin Brady warned Wednesday that U.S. companies face strong pressures to move their headquarters out of the U.S. because of the tax code.
“I’m convinced that America’s beginning to hear the giant sucking sound of American companies, jobs and investment overseas,” the Texas Republican said at the first hearing on an effort to reform international taxation, invoking the words independent presidential candidate Ross Perot used in 1992 to describe what he thought the effects of the North American Free Trade Agreement would be.
“The root cause is our tax code,” Brady said. “I’m convinced the first step we can take toward overall pro-growth tax reform is to permanently lower the tax gates, allow our U.S. companies to bring their profits back home to invest in their communities.”
Any measure to accomplish Brady’s goal this year, however, would have to gain support of Democrats in the Senate and White House. The path is narrow, if the comments from Brady’s Democratic counterpart on the committee are any indication.
“There are immense difficulties in doing piecemeal tax reform,” Rep. Sander Levin, D-Mich., said at Wednesday’s hearing.
Levin cited the remarks this month from Doug Oberhelman, the CEO of Caterpillar, who suggested that a narrow effort on international tax reform wouldn’t work for business and that broader legislation reforming the business side of the tax code was the only way forward.
Levin and other Democrats have backed bills aimed at blocking tax inversions without reforming the entire tax code.
Brady’s Republican colleague and chairman of the taxation subcommittee, Rep. Charles Boustany of Louisiana, suggested Tuesday in a speech in downtown Washington that the passage of international tax legislation through Congress was “probably unlikely.”
But Brady’s remarks at the hearing and an op-ed published on Fox News Wednesday highlighted the urgency he places on working on a solution now.
Brady has warned that this year as many as 30 companies might attempt to undergo inversions, maneuvers in which they lower their U.S. tax bill by merging with a business in a low-tax country and then move the headquarters of the combined company there.
Witnesses at Wednesday’s hearing testified that one of the main reasons companies want to move out of the U.S. is the 35 percent corporate income tax rate, which is the highest among advanced economics. Because that rate is applied to all worldwide income, an unusual feature of the U.S. tax code, executives try to avoid bringing overseas earnings back into the U.S., with the result than an estimated $2.1 trillion in corporate earnings have been stranded outside the country — cash that companies would like to access more easily.
The changing tax landscape “will only continue to increase these pressures on corporate management,” testified Michelle Hanlon, a professor of accounting at the Massachusetts Institute of Technology.
Itai Grinberg, a Georgetown law professor, warned the lawmakers that the future would be dimmer for Americans without corporate tax reform that lowers tax rates to around the average rates for advanced countries.
“What will happen, unless we act to produce a competitive system that leapfrogs us at least to the middle of the pack, is that over time, there will be corporations that migrate offshore or are incorporated offshore to start, and more and more of their high-skilled, high-quality opportunities will be staffed abroad … They’ll be in Europe, not in the United States,” Grinberg said. “As a result, I really do fear that there will be fewer opportunities for younger people in the U.S.”
