The late and illustrious Sen. Daniel Patrick Moynihan (D-N.Y.), whose very distinguished career included being chairman of the Senate Finance Committee, was highly critical of the method for enacting tax legislation. He reportedly remarked that the system often resulted in a “1200 page monster, we vote for it, no knows what’s in it.” This is certainly apropos for many of the tax sections of the Build Back Better Act passed by the House.
Four years ago, in a very rushed, six-week time-frame, congressional Republicans passed — at President Trump’s exhortation, with presumably little thought except that it pleased their campaign contributors and contained a $10,000 cap on state and local tax deductions adversely impacting mainly blue states — what is known as the Tax Cuts and Jobs Act. The act made fundamental changes to the Internal Revenue Code, resulting in substantial increases to the deficit along with the substantial migration of both profits and jobs abroad.
Instead of absorbing the proper lessons from the Tax Cuts and Jobs Act miscarriage, congressional Democrats have saddled some worthy policy objectives in the Build Back Better Act with many incredibly complex and highly questionable tax provisions.
While there is a clear necessity to address many human infrastructure challenges and to do so as expeditiously as possible, this doesn’t excuse a Democratic version of the Tax Cuts and Jobs Act. How many members of Congress who voted for Build Back Better have any idea of the loophole created by provisions in the legislation weakening longstanding policy on the taxation of foreign base company sales and services income in Subpart F? It is not important that the reader understand what this is all about, but those members of the House who voted aye should comprehend its significance and cost.
What about the other countless pages of changes to the Internal Revenue Code’s international and corporate tax provisions contained in the Build Back Better Act, vastly increasing tax complexity? Aren’t our representatives and senators aware that this will increase the difficulty and cost of complying by taxpayers, not to mention the fact that the IRS will be confronted with the virtually impossible task of auditing the tax returns affected by these changes?
While there are some sound tax policy revisions contained in Build Back Better, others ought to be removed. For example, the act contains country-by-country Global Intangible Low Taxed Income (GILTI) calculations. GILTI was included in the Tax Cuts and Jobs Act to purportedly prevent profits and jobs from exiting the U.S. when the Republicans made most dividends from foreign subsidiaries to U.S. multinationals tax-free pursuant to section 245A. GILTI did not, however, plug the hole in the dike.
What Build Back Better should be doing is repealing sections 245A and GILTI. U.S.-based multinationals should be taxed immediately on their worldwide earnings, but at a rate a few points lower than normal when earned by their foreign subsidiaries, coupled with potential foreign tax credit relief to minimize double taxation. The lower rate would not, however, apply to the “bad” income contained in Subpart F. This would be fairer and much easier to comply with in comparison to the direction chartered in Build Back Better.
Moynihan correctly and prophetically commented about why the tax laws 20-plus years ago were in the shape they were in: “It’s our doing … We’re the one’s doing it, not the IRS.”
While corporate tax law by its nature can’t be uncomplicated, it can certainly be simpler and fairer than what was done in the Tax Cuts and Jobs Act and contained in the Build Back Better Act.
Philip G. Cohen is a professor of Taxation at Pace University’s Lubin School of Business, and a retired vice president-Tax & general tax counsel at Unilever United States, Inc. The views expressed herein don’t necessarily represent any organization that Cohen is or was associated with.