Sen. George Voinovich unveiled broad-based tax reform legislation (S. 3162) focused on cutting the domestic corporate rate from 35 percent to 28 percent and eliminating international tax breaks that he said encourage companies to move jobs overseas.
In introducing the bill, Voinovich said he intends his legislation to become part of a larger debate on tax reform in the next Congress and wants to start a debate on how the United States can be more competitive in the world economy.
He said the bill is intended to end breaks such as tax shelters that let foreign competitors hide U.S. income offshore, tax credits for moving technological innovations--and high-wage manufacturing jobs--overseas, loopholes that encourage reincorporation in low-tax jurisdictions, and an exemption for executives of offshore hedge funds who put their money in certain deferred compensation plans.
The Ohio senator said the next Congress will bring with it "a perfect storm for the tax code."
'Historic Opportunity' Seen
"When the Senate reconvenes in January 2009 for the 111th Congress, we will have an historic opportunity, through fundamental tax reform, to transform the U.S. economy in a manner that will make our nation stronger and more prosperous for generations," Voinovich said in his introductory remarks.
With a new president likely to be seeking major tax changes, the expiration of 2001 and 2003 tax cuts, and the encroaching alternative minimum tax, the stage will be set, the Ohio senator said.
"The competitive pressures of a global economy will force us to change our uncompetitive and inefficient methods of business taxation, including one of the highest corporate marginal rates in the world," he said. "I am not proposing today a comprehensive tax reform bill that would touch every part of the tax code, but I am introducing legislation that addresses one large piece of tax reform, in the hopes of starting a conversation that will inform policymakers as we develop a more comprehensive reform in the next couple of years."
Voinovich said the bill is known as the Manufacturing, Assembling, Development, and Export in the USA--or MADE in the USA--Tax Act.
Corporate Rate Cut Viewed as Centerpiece
He said the domestic corporate rate cut is the centerpiece of his legislation, noting the United States has the second highest corporate rate among the 30 member states of the Organization for Economic Cooperation and Development.
Among some of its major features, the bill would increase the domestic activities deduction under tax code Section 199 for partnerships, S corporations, and sole proprietorships to 12 percent from 9 percent, although that benefit would be taken away for Subchapter C corporations because they would get the benefit of the 7 percent reduction in the top corporate tax rate.
It also would make permanent the 2003 expansion in small business expensing, repeal controversial changes made in 2006 to the housing exclusion for U.S. citizens working abroad, and repeal the highly unpopular 3 percent withholding requirement on payments to federal contractors.
International Provisions Outlined
In the arena of provisions intended to eliminate incentives to move jobs and profits overseas, the bill would:
- include all foreign-source royalties in passive category income in applying the foreign tax credit limitation;
- apply the foreign tax credit limitation separately to financial services income;
- treat certain foreign corporations "managed and controlled" in the United States as domestic corporations;
- treat certain entities with single owners as corporations;
- include an anti-treaty shopping provision found in tax reform legislation also proposed by House Ways and Means Committee Chairman Charles Rangel (D-N.Y.);
- repeal special source rules for inventory property;
- clarify the determination of foreign oil and gas extraction income;
- modify the limitation on excess interest deductions of certain corporations;
- shut down abusive nonqualified deferred compensation arrangements; and
- restrict the refundable child tax credit available to taxpayers outside the United States.
In introducing his bill, Voinovich acknowledged that a number of factors contribute to a company's decision about where to locate activity and jobs, including wages, workforce skills, transportation costs, and local regulations.
'Tax Push' Cited
However, he said, "there is no doubt that taxes are an important factor. Recent economic research concludes that in a global economy, workers bear the brunt of higher corporate tax rates, through lower wages and fewer jobs. Therefore, it is imperative that we have a tax code that makes the United States an attractive place to locate production, research, and other activity. While the MADE in the USA Tax Act would not address the 'wage pull' that sends jobs to places like China and India, it would deal with the 'tax push' that encourages jobs to leave the United States."
He said recommendations by President Bush's tax reform commission belong as a key part of the national discussion on fundamental tax reform.
"I know there is bipartisan support in this Chamber to move forward on fundamental tax reform. It probably won't happen this year, but that doesn't mean that we shouldn't get started right away. We need to start setting the table," Voinovich said in his statement.
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