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PRO: A Bill To Reform Federal Corporate Taxation 1. 2. 3. Contents A Bill To Reform Federal Corporate Taxation: Background Information & Commentary Territorial Tax System a. Under The Current System, $1.6 Trillion Us Profits Is Being Kept Overseas b. Universal System Discourages Us Investment c. Other Countries Dont Tax Overseas Profits Corporate Taxes a. This Bill Would Lower Corporate Taxes Overall b. Corporate Taxes Are Too High c. Corporate Taxes Should Be Lowered Because They Are The Most Harmful For Growth Lower Corporate Taxes Continued a. Corporate Tax Decrease Increases Revenues b. Corporate Tax Decrease Helps Workers c. 25% Corporate Tax Rate Is Revenue-Maximizing Get Rid Of Deductions a. Deductions = Corruption/ Supermajority Makes Sense Because Getting Deductions Should Be Hard b. Current Deductions Reward Accounting Gymnastics c. Current Deductions Distort Incentives, Create Inefficiencies Get Rid Of Deductions Continued a. Current Deductions Incentivize Debt b. Current Deductions Pick Favorites c. Current Deductions Means High Compliance Costs Miscellaneous a. Why Corporate Income Tax Going Down As % Of GDP b. Public Opinion Of Corporations Polls

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A Bill to Reform Federal Corporate Taxation Background Information & Commentary SECTION 1. The United States Congress, in conjunction with the IRS, will decrease the base rate at which top bracketed corporations are taxed from the current 35% rate to a 25% rate. SECTION 2. The top tax bracket shall be defined as corporations making over $18,333,333 in one year. The top tax bracket is currently at $18,333,333 according to the 2011 IRS Instructions for Form 1120 (see right). SECTION 3. Any and all corporate deductions shall be eliminated unless voted on and passed by a supermajority vote in the House of Representatives. Unconstitutional? This bill just wants to bypass the senate and the president?
U.S. Constitution: Article I, Section 7 (http://www.archives.gov/exhibits/charters/constitution_transcript.html) All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills. Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States: If he approve he shall sign it, but if not he shall return it, with his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together with the Objections, to the other House, by which it shall likewise be reconsidered, and if approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses shall be determined by yeas and Nays, and the Names of the Persons voting for and against the Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law. Every Order, Resolution, or Vote to which the Concurrence of the Senate and House of Representatives may be necessary (except on a question of Adjournment) shall be presented to the President of the United States; and before the Same shall take Effect, shall be approved by him, or being disapproved by him, shall be repassed by two thirds of the Senate and House of Representatives, according to the Rules and Limitations prescribed in the Case of a Bill. IRS, 2012 (http://www.irs.gov/app/understandingTaxes/teacher/whys_thm01_les02.jsp#Background) The U.S. Constitution describes a formal tax legislation process. A proposed tax law, called a bill, follows specific steps, beginning in the Ways and Means Committee of the House of Representatives. After a tax bill is approved by both the House and the Senate, it goes to the president, who can either sign the bill into law or veto it. The following are specific steps in the process: 1. The tax bill is initiated in the House of Representatives and referred to the Ways and Means Committee. When members of this committee reach agreement about the legislation, they write the proposed law. 2. The bill goes to the full House, where it is debated, possibly amended, and eventually approved. 3. The bill goes to the Senate, where it is reviewed and often rewritten by the Finance Committee. The committee's version is then presented to the full Senate. 4. After the Senate approves the bill, it is sent to a joint committee of House and Senate members, who try to arrive at a compromise version. 5. The compromise version of the bill is sent to both the House and the Senate for approval. 6. After Congress passes the bill, it goes to the president, who can either sign it into law or veto it. 7. If the president vetoes the bill, Congress may try to override the veto with a two-thirds vote of each house. If this vote succeeds, the bill becomes law without the president's signature.

SECTION 4. The US corporate tax system shall also be reformed into a territorial system as opposed to the current universal system. The United States currently operates under what is known as a worldwide tax system, meaning that business income is taxed at the U.S. rate regardless of whether the income is earned within American borders or overseas. Under this collection method, American companies pay the corporate tax in the host country, and when profits are repatriated back to the United States, the company pays the difference between what was paid to the host country and what would have been owed under the U.S. rate.
SECTION 5. This law will take effect on the first day of the new fiscal year after passage. SECTION 6. All laws in conflict with this legislation are hereby declared null and void.

TERRITORIAL TAX SYSTEM For More Evidence, Open the Ten Reasons Why Article UNDER THE CURRENT SYSTEM, $1.6 TRILLION US PROFITS IS BEING KEPT OVERSEAS Richard Rubin, Bloomberg, March 2 2012, Cash Hoard Grows by $187 Billion in Untaxed Overseas Profits o As U.S.-based companies expand globally, they keep profits overseas, legally out of the reach of the Internal Revenue Service the latest data suggest that, in all, U.S. companies have more than $1.6 trillion outside the country. UNIVERSAL SYSTEM DISCOURAGES US INVESTMENT Reform The Outdated Tax System To Enhance American Competitiveness, The Jobs Council, 2012 o While most other developed nations have adopted territorial systems that exempt most or all foreign income from taxes when they are repatriated, the U.S. subjects all worldwide earnings to the corporate income tax when they are brought home to the U.S. This approach actually encourages U.S. companies to keep their earnings abroad rather than investing them here at home. Adopting a territorial tax system would bring us in line with our trading partners and would eliminate the socalled lock-out effect in the current worldwide system of taxation that discourages repatriation and investment of the foreign earnings of American companies in the U.S. OTHER COUNTRIES DONT TAX OVERSEAS PROFITS Hodge, Scott. (May 2011). Ten reasons the U.S. should move to a territorial system of taxing foreign earnings. The Tax Foundation, o The United States is the only G-8 country that still taxes the worldwide income of businesses headquartered in America. Among the 34 OECD countries, 26 use a territorial tax system, whereby little or no additional home country tax is imposed on active trade or business profits earned abroad when those earnings are remitted home. o Our largest trading partners Canada, Great Britain, and Japan have all effectively moved toward a territorial or exemption form of taxing the foreign profits of their multination firms. Indeed, of the 34 OECD member nations, 26 have either a full territorial system or exempt at least 95 percent of foreign earnings from repatriation taxes. The U.S. remains the only country in the OECD with a worldwide system and a corporate rate above 30 percent. nd David Kocieniewski , New York Times, May 2 2011, U.S. Has High Tax Rates But Pays Less o The United States is virtually alone in trying to tax its multinational corporations on their foreign earnings. nd David Kocieniewski , New York Times, May 2 2011, U.S. Has High Tax Rates But Pays Less o The United States is virtually alone in trying to tax its multinational corporations on their foreign earnings, but it allows companies to avoid those taxes indefinitely by keeping profits overseas. That encourages companies to use accounting maneuvers to shift profits to low-tax countries and to invest profits offshore. Government Accountability Office, "U.S. Multinational Corporations: Effective Tax Rates Are Correlated with Where Income Is Reported," August 2008, http://www.gao.gov/new.items/d08950.pdf o The average U.S. effective tax rate on foreign-source income is around 4 percent.

LOWER CORPORATE TAXES THIS BILL WOULD LOWER CORPORATE TAXES OVERALL Congressional Research Services, March 31 , 2011 International Corporate Tax Rate Comparisons and Policy Implications Jane G. Gravelle, Senior Specialist in Economic Policy o If every corporate tax expenditure were repealed, including those mentioned previously, the corporate rate
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could be cut by 5.6 percentage points, to 29.4%, assuming no behavioral responses.

Michelle Hirsch, The Fiscal Times, November 2 , 2011, Corporate Tax Reform Hits a 25 Percent Roadblock o If all corporate tax expenditures were axed, the lowest the rate could go and remain revenue neutral would be 28 percent according to a new analysis from the Joint Committee on Taxation of the US th Congress (October 27 , 2011). rd U.S. Department Of The Treasury, July 3 , 2007, Treasury Conference On Business Taxation And Global Competitiveness o If the revenue from tax preferences were used to lower the corporate tax rate, the rate could be lowered from 35 percent to 27 percent while producing approximately the same revenue. CORPORATE TAXES ARE TOO HIGH Cato Institute, New Estimates of Effective Corporate Tax Rates on Business Investment, by Duanjie Chen and Jack Mintz, School of Public Policy, University of Calgary o U.S. effective corporate tax rate on new investment was 34.6 percent in 2010, which was the highest rate in the OECD and the fifth-highest rate among 83 countries. The average OECD rate was 18.6 percent, and the average rate for 83 countries was 17.7 percent. Organisation for Economic Co-operation and Development. (2011). OECD tax database. Paris, France. Retrieved from www.oecd.org/ctp/ Taxdatabase o The U.S. combined statutory corporate tax rate stands at 39.2 percent, now the highest in the Organisation for Economic Co-operation and Development (OECD) after Japan reduced its corporate rate this year. This U.S. statutory rate is more than 50 percent higher than the 25.1 percent average corporate tax rate in the rest ofthe OECD in 2011. Copublication of The World Bank and the International Finance Corporation, 2012, Economy Profile: United States Indicator Profit tax (%) The amount of taxes on profits paid by the business as a percentage of the commercial profits. United States 27.6 OECD 15.4
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CORPORATE TAXES SHOULD BE LOWERED BECAUSE THEY ARE THE MOST HARMFUL FOR GROWTH Organization for Economic Cooperation and Development, Tax and Economic Growth, July 11, 2009, http://www.oecd.org/LongAbstract/0,3425,en_2649_33733_40958797_119684_1_1_1,00.html o Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption.

LOWER CORPORATE TAXES Continued CORPORATE TAX DECREASE INCREASES REVENUES National Center For Responsive Politics, Mehreen Younis, September 29, 2008, The Case for Corporate Income Tax Cuts http://www.ncpa.org/pub/ba633 o The average corporate tax rate in 19 OECD countries fell from 45 percent in 1985 to 29 percent by 2005 (16%), while corporate tax revenues soared from 2.6 percent to 3.7 percent of gross domestic product (GDP). CORPORATE TAX DECREASE HELPS WORKERS National Center For Responsive Politics, Mehreen Younis, September 29, 2008, The Case for Corporate Income Tax Cuts http://www.ncpa.org/pub/ba633 o People ultimately pay taxes, not corporations. Thus, corporate tax hikes unintentionally hurt workers. Workers bear slightly more than 70 percent of the burden of high corporate taxes in the form of reduced wages. A $1 increase in corporate taxes tends to reduce real median wages by 92 cents. A 1 percentage-point increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates. 25% CORPORATE TAX RATE IS REVENUE-MAXIMIZING

Alex Brill, Corporate Tax Rates: Receipts and Distortions, Tax Notes, December 22, 2008. Jack Mintz, 2007 Tax Competitiveness Report, C. D. Howe Institute, September 2007. o High U.S. corporate tax rate reduces government revenues because it increases tax avoidance. Empirical studies (cited above) have found that the revenue-maximizing corporate income tax rate is about 25 percent today and has declined over time. The U.S statutory and effective corporate rates are much higher than the revenue-maximizing rate, thus both the government and the economy would gain from a major rate cut.

GET RID OF DEDUCTIONS DEDUCTIONS = CORRUPTION SUPERMAJORITY MAKES SENSE BECAUSE GETTING DEDUCTIONS SHOULD BE HARD Fareed Zakaria, TIME Magazine, October 20 , 2011, Complexity Breeds Corruption o Special interests pay politicians vast amounts of cash for their campaigns, and in return they get favorable exemptions or credits in the tax code. In other countries, this sort of bribery takes place underneath bridges and with cash in brown envelopes. In America it is institutionalized and legal, but it is the samecash for politicians in return for favorable treatment from the government. The U.S. tax system is not simply corrupt; it is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money to its favored funders through the tax codewithout anyone realizing it. The simplest way to get the corruption out of Washington is to remove the prize that members of Congress give away: preferential tax treatment. A flatter tax code with almost no exemptions does that. o The federal code (plus IRS rulings) is now 72,536 pages in total. The code itself is 16,000 pages. The statist French have a tax code of 1,909 pages, only 12% as long as ours. Donald Marron, director of the Urban-BrookingsTax Policy Center, former acting director of the Congressional rd Budget Office, Christian Science Monitor, March 23 , 2012, US Corporate Tax Rates Must Come Down o Targeted tax preferences, which Congress created to intentionally benefit specific companies or industries, cost an estimated $100 billion more a year. CURRENT DEDUCTIONS REWARD ACCOUNTING GYMNASTICS Donald Marron, director of the Urban-BrookingsTax Policy Center, former acting director of the Congressional rd Budget Office, Christian Science Monitor, March 23 , 2012, US Corporate Tax Rates Must Come Down o Furthermore, some business owners complain that the American system unfairly rewards disingenuous bookkeeping rather than innovation. It forces companies to compete based not on product quality and services, but on accounting gymnastics, said Paul Egerman, former chairman and chief executive of eScription, a medical transcription service in Boston. o No one is certain how much creative accounting costs the federal government in lost revenue, but most estimates say it easily exceeds $50 billion a year. o Some American corporations use aggressive strategies to pay less often far less than their competitors abroad and at home. A Government Accountability Office study released in 2008 found that 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied. o The paradox of the United States tax code high rates with a bounty of subsidies, shelters and special breaks has made American multinationals world leaders in tax avoidance, according to Edward D. Kleinbard, a professor at the University of Southern California who was head of the Congressional joint committee on taxes. CURRENT DEDUCTIONS DISTORT INCENTIVES, CREATE INEFFICIENCIES David Leonhardt, New York Times, February 1 2011, The Paradox of Corporate Taxes o The current system is that it distorts incentives. Decisions that would otherwise be inefficient for a company and that are indeed inefficient for the larger economy can make sense when they bring a big tax break. Companies should be making investments based on their commercial potential, as Aswath Damodaran, a finance professor at New York University, says, not for tax reasons. Instead, airlines sometimes buy more planes than they really need. Energy companies drill more holes. Drug companies conduct research with only marginal prospects of success. Inefficiencies like these slow economic growth.
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GET RID OF DEDUCTIONS Continued CURRENT DEDUCTIONS INCENTIVIZE DEBT Donald Marron, director of the Urban-BrookingsTax Policy Center, former acting director of the Congressional rd Budget Office, Christian Science Monitor, March 23 , 2012, US Corporate Tax Rates Must Come Down o The system perversely favors debt financing over equity. Interest payments are tax-deductible, while dividends are not. Corporations thus have a strong incentive to finance their investments by borrowing. Given what our economy's been through, it is hard to believe that the tax system ought to subsidize more debt. CURRENT DEDUCTIONS PICK FAVORITES National Bureau of Economic Research, Kevin S. Markle, Douglas A. Shackelford, February 2011, Cross-Country Comparisons of Corporate Income Taxes o At the high end, American retailers paid 31 percent in total income taxes, construction 30 percent and manufacturers 26 percent. Financial services companies paid an average of 20 percent, real estate 19 percent and mining 6 percent. Donald Marron, director of the Urban-BrookingsTax Policy Center, former acting director of the Congressional Budget rd Office, Christian Science Monitor, March 23 , 2012, US Corporate Tax Rates Must Come Down o The system plays favorites among different businesses. Retailers and construction companies, for example, pay an average tax rate of 31 percent, according to recent Treasury Department calculations, while utilities pay only 14 percent and mining companies (which include fossil fuel producers) pay only 18 percent. st David Leonhardt, New York Times, February 1 2011, The Paradox of Corporate Taxes o Of the 500 big companies in the well-known Standard & Poors stock index, 115 paid a total corporate tax rate both federal and otherwise of less than 20 percent over the last five years. Over the last five yearsBoeing paid a total tax rate of just 4.5 percent, according to Capital IQ. Southwest Airlines paid 6.3 percent. And the list goes on: Yahoo paid 7 percent; Prudential Financial, 7.6 percent; General Electric, 14.3 percent. CURRENT DEDUCTIONS MEANS HIGH COMPLIANCE COSTS The Presidents Framework For Business Tax Reform:A Joint Report by The White House and the Department of the Treasury, February 2012 o The tax preferences created by tax expenditures and loopholes add complexity to the tax system and contribute to a substantial business tax compliance burden. Additional rules and regulations are needed to limit incentives to their intended beneficiaries. Taxpayers have to spend time and money learning about tax incentives and often rely on third parties to help them navigate the thicket of complex tax rules. The Internal Revenue Service (IRS) has to spend resources monitoring and enforcing the rules. Disputes invariably arise between the IRS and taxpayers, and society expends resources adjudicating these disputes. Govt Accountability Office, Gao-05-878, Summary Of Estimates Of The Costs Of The Federal Tax System 14 Tbl.3 (2005). o It is estimated that the administrative and compliance costs in the corporate income tax system now exceed $40 billion per year, or more than 12 percent of revenue collected.

MISCELLANEOUS Jim Puzzanghera, Los Angeles Times, April 20 2011, Bipartisan support builds for slicing corporate tax rate o The top tax rate for corporations has dropped from 52% in 1952 to 35% today. That has led corporate taxes as a share of U.S. economic output to decrease from 6.1% in 1952 to 1.3% last year. But tax experts said another reason for the decline is the dramatic expansion over the last 30 years of business owners' paying taxes on their individual returns. That has shifted hundreds of billions of dollars from the corporate side of the tax ledger.
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