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| June 5th, 2006 |
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Media Contact(s): Peter Carr (202) 224-9854,
Jared Whitley (202) 224-0134 |
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Printable Version |
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HATCH: INTERNATIONAL TAX REGIME IS IN SERIOUS NEED OF REFORM
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Washington - Sen. Orrin G. Hatch (R-Utah) gave a speech to the Organisation for Economic Co-operation and Development (OECD) about ways to streamline the tax code so it reflects the importance U.S. society puts on increasing the prosperity of its citizens. Hatch is on track to become chairman of the Senate Finance Committee in 2009.
Address of Senator Orrin G. Hatch Before the OECD
Initiatives in International Taxation Conference
Washington, D.C.
June 5, 2006
Thank you very much for the kind introduction, Ambassador Morella, and for the warm greeting from all of you. I worked closely with Congresswoman Morella when she represented Maryland in the House of Representatives, and you all should know I am a huge fan.
It is my pleasure to be here today to offer a few thoughts on several tax issues we’ve been grappling with over the past few months. I’m not about to lecture an august group such as yourselves on the intricacies of transfer pricing, but our international tax regime is in serious need of reform if we want to have it contribute, rather than detract, from our economy’s ability to continue to grow and produce good jobs for Americans.
Whenever I think of international taxation, I always think of G.I. Joe. When my youngest son was 10, he began collecting G.I. Joe action figures, which at that time came with cards that described the various skills and weapons proficiencies of G.I. Joe and his compatriots, as well as his enemies. G.I. Joe, of course, was the best-trained of the bunch, and his card listed his extensive weapons training, his combat medals, his fluency in a number of different languages, and closed with the words “And of course, G.I. Joe knows the ins and outs of international finance.”
As some of you may know, I am likely to become either the chairman or ranking minority member of the Senate Finance Committee after the next Congress, and my term in that position has the potential to be an especially eventful one, to say the least. Regardless of the outcome of the next two elections, I believe that 2009 will mark the opening of a policy window for making significant progress on a number of increasingly pressing problems with our tax code.
This opening goes beyond a changing of the guard at the White House and relevant congressional committees; the Internal Revenue Code has been buffeted yearly by myriad exemptions, amendments, provisions, and the like. It has left us with a Byzantine system that is unduly complicated, frequently at odds with itself, and, most importantly, has become a major obstacle to long-run economic growth. The steadily increasing complexity of our current system, (which will no doubt be exacerbated by the pension bill we are currently negotiating), along with the expiration of the 2001 tax cut provisions will create a serendipitous period when some significant reform will be possible. Every sentient tax professional knows that the system needs to be fixed, and, more importantly, a growing number of voters are beginning to feel the same way.
Perhaps the biggest impetus for tax reform will be the growing reach of the Alternative Minimum Tax. The Joint Committee on Taxation estimates that in 2010, it will generate more revenue than will the rest of the tax code, and the insidious nature of this creature is going to anger a goodly number of people if we don’t fix it soon. The series of one year “patches” that we keep passing, at an increasingly expensive cost in terms of foregone revenue, is no way to conduct sensible tax policy.
While attempting something akin to the kind of fundamental reform promised by a flat tax, a national retail sales tax, or even the amount of reform achieved in 1986 is a worthy goal and well within the realm of the possible, the odds are against wholesale reform succeeding in one fell swoop. I expect the Congress will not merely acquiesce and allow the re-imposition of pre-2001 tax rates without engineering at least some reform, but the size and scope of the reform is anyone’s guess. It may be more realistic and practical to systematically pursue a series of incremental changes on both the personal and corporate side of the tax code in the proceeding years.
Some general goals in any reform of the personal income tax code, at least from my perspective, would be to broaden the tax base, simplify the code, and lessen the taxation on investment income. For instance, extending permanently the lower tax rates on capital gains and dividend income would be a continued boon to economic growth at a relatively low cost to the Treasury and should certainly be included in any reform.
The tax treatment of investment income leads us to the central question of any tax reform. While economists tell us that the taxation of the returns from investment in capital should be minimized, and taxed no more than once, the distributional consequences of such a change would be politically difficult to countenance.
We all know that corporations do not pay taxes; only people do. However, this is a concept that is lost on a goodly number of people and constituencies who react with alarm whenever life is made a bit easier for corporations, especially those that operate abroad. We saw this a few years ago when Lou Dobbs and his ilk suggested that “outsourcing” of jobs abroad would hollow out the economy. Nothing of the sort occurred, of course, but a wariness of international trade and investment still hangs in the air, and we need to do more to combat this. Strong economic growth is in everyone’s best interest, as the healthy increase in real wages over this past year amply demonstrates.
Given the political constraints that make reform so difficult, especially on the corporate side, international tax competition can provide an important impetus in achieving some progress. In a welcome trend, worldwide corporate tax rates have been gradually falling over the past two decades. Unfortunately, over that period our own corporate tax rate has gone from being somewhat competitive to the highest on the list.
A continuing trend among our trading partners toward lower corporate tax rates may be what we need to develop the political will to address this, at least if this force is coming from other OECD countries.
Tax competition driven by the presence of tax havens, on the other hand, creates an unhealthy situation, and I support attempts to curb their presence. Economists Joel Slemrod and Jay Wilson demonstrated the costs that tax havens can impose on other countries, and it is considerable. I’m usually the last one to be talking about there being “too much” competition. Typically, such a complaint serves only as a prelude to some kind of collusion. And I know that some high-tax jurisdictions resent not only tax havens but also developing countries that seek to reduce poverty by pursuing a low-tax, low-service environment to attract investment and jobs. Attempts to deal with tax havens have to allow for genuine tax competition to flourish.
I am well aware that the U.S. tax system puts multinational firms based in the U.S. at a disadvantage to their European rivals due to our system of worldwide taxation. The repeal of FSC-ETI, dictated by the WTO, has made our system even less competitive, and its replacement is simply not that good at ameliorating the disadvantages inherent in our tax regime. Since it now appears that we cannot have an export tax subsidy without violating our WTO obligations, a territorial tax system, like what most European countries have in place, may make more sense, and I think moving in that direction would be good policy.
One thing I know for sure is that serious tax reform will always be impossible without strong leadership from the White House. Any substantial reform is going to need a president who will be able to rally not only the populace behind such a change but who will also be able and willing to engage leaders from both parties in putting aside partisan interests and doing what is best for the country. I do not have a crystal ball and am not about to speculate who will win in 2008, but I am hopeful that regardless of which party claims the presidency that we will have a leader interested in genuine reform.
Len Burman of the Urban Institute recently wrote that it is time that both sides of the debate to agree that the U.S. tax code be designed solely to collect money in the most efficient way possible, so that it does the least damage to economic growth. From that beginning we can then move address distributional issues outside of the scope of the tax code.
This makes a lot of sense, I think. Strong economic growth is in everyone’s best interest, and we have not done a good job in communicating that fact. Too often people or vested interests see economic growth as a barrier to a cleaner environment, or stronger families, or less poverty, when in fact nothing could be further from the truth. Nearly everyone in society benefits from a more productive economy, especially those on the lower run of the economic ladder.
It is even more true when we consider the financial challenges this country faces down the road. Our entitlement obligations are simply staggering and growing every day with few in Congress having the courage to face this disturbing fact. Our government risks pulling down the economic ship with the weight of its obligations unless we get this vessel moving faster and lessen its load. We can easily see what can happen when this problem is ignored by looking across the Atlantic at much of Western Europe, where entitlement shortfalls are more pressing and economic growth is almost non-existent.
The benefits to economic growth go beyond mere prosperity. As Benjamin Friedman argues so persuasively in his recent book The Moral Consequences of Economic Growth, the mere opportunity for all citizens to achieve a higher standard of living for themselves or their children creates a healthier, more amenable, more moral society, and its absence can wreak havoc.
A friend once told me that to really understand the values of a country one should start by looking at its tax code. I want our tax code to reflect ultimately the importance our society puts on increasing the prosperity of its citizens above all else. Without a productive economy everything else we think is important, such as the defense of our country and the improvement of our nation’s health care system, simply cannot be done.
I know many of you have been thinking about tax issues for years and have much to contribute. I am under no illusion that I have all the answers to what ails our tax code, and I welcome any suggestions for how to improve the current tax code, especially with regards to the intricacies of international tax law. Given what will be on our plate, we are going to need all the help we can get!
It has been my pleasure to appear before you today. Thank you for this opportunity.
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