Corporate tax reform: a work in progress

The bubbling buckets of corporate muck plus the descent of stock prices on Wall Street have given fresh impetus in Congress to what is being called a "corporate tax bomb."

It's a massive package of corporate tax changes introduced July 11 by Rep. William Thomas, chairman of the powerful House Ways and Means Committee. The bill would take aim at thriving corporate tax shelters. It would also impose a moratorium on the paper relocation of companies to tax havens such as Bermuda.

And it would open huge, new, and long-sought tax breaks for corporations, an idea that doesn't sit well with some Democrats.

"Ending tax-shelter abuse is more than changing one loophole for another," complains Rep. Lloyd Doggett (D) of Texas.

Democrats on the committee have had much of their tax-reform thunder stolen and incorporated into the Thomas bill. Mr. Doggett has proposed legislation since 1999 that would restrain corporate tax shelters. But the Republican-controlled committee has "derided or avoided" the bill, he says.

Rep. Dick Armey (R) of Texas has said he saw no difference between a company fleeing to Bermuda to escape United States taxes and individuals claiming medical and other deductions on tax forms.

But as corporate scandals escalated, the mood has changed.

"With the market doing so poorly, even the Republicans fear a political backlash and need to inoculate themselves to assure Americans they are doing what is necessary to protect them from corporate chieftains," says Martin Sullivan, an economist with Tax Notes, a tax-industry publication.

More briefly, Doggett says: "The Republicans have got religion on this issue."

The Thomas bill was supposed to come up for a committee markup last week. It didn't.

The bill is extremely complicated. Some companies might owe more taxes, some less. With corporate lobbyists flooding Capitol Hill, representatives likely are sorting out the impact on companies in their districts, estimating possible political consequences.

Thomas has hinted the bill might get further changes, and might not emerge for markup until after the August recess. If it passes in the House, it would go to the Senate, where it faces a crowded legislative calender. There is already speculation that Congress will hold a session after the fall election.

From a revenue standpoint, the Thomas bill is slightly positive over the next 10 years, calculates Congress's Joint Committee on Taxation. That's important with the budget in deficit by $165 billion.

Closing some corporate tax shelters will raise $8.5 billion. Reducing tax avoidance through corporate "stripping and expatriation" adds another $6.3 billion. ("That's when a company sends Uncle Sam a postcard that says 'Sorry, you can find me in Barbados. Glad you are not here,' " says Doggett.) Other provisions would raise $21 billion.

The bill also includes some 20 new tax shelters saving companies about $80 billion. These mean US multinationals "will have less of a hassle in the US tax code to carry out their business activities," says Thomas.

One item, however, would close a $51 billion loophole. That's the repeal of the Extraterritorial Income Exclusion Act. The World Trade Organization, on complaint of the European Community, declared this tax break for US multinationals to be in violation of international trade rules.

Thomas figures this repeal would bring the US into compliance with the WTO, ending what threatens to be a trade war.

The Thomas bill is labeled the American Competitiveness and Corporate Accountability Act.

But to David Rosenbloom, a tax lawyer with Caplin & Drysdale in Washington, D.C., the Thomas thesis that American firms are disadvantaged by the tax system is "horsefeathers." The US system is "the envy of the world," he says.

Mr. Rosenbloom views the tax-shelter business as "a scandal" and the entire tax system as too complex. Congress is a "major contributor" in that regard, he says.

The US is too generous in taxing foreign companies, he adds.

His big concern is that Congress, in its panic over corporate scandals, will dramatically alter without enough thought a system that has been in place for decades.

In some ways, corporate taxation is a strange business. Corporate finances are complex. The tax rules are often fuzzy. The result is that a corporation's tax bill often ends up negotiated between a firm's top tax expert and an Internal Revenue Service collector.

What troubles the IRS is that corporations, to some extent with congressional help, have been avoiding more and more taxes.

A new IRS study finds that a gap between pretax income on corporate books and net income for tax purposes grew from $93 billion in 1996 to $159 billion in 1998, or nearly 72 percent.

Presumably the Thomas bill would close some of the tax shelters evident in that tax gap. If, says Doggett, there aren't too many "ands, ifs, ors, and buts" in the fine print of the bill.