In a letter to Treasury Secretary Jacob Lew, House Democrats expressed concern with the administration’s proposed “Debt-Equity” regulations. They now join Ways and Means Committee Chairman Kevin Brady (R-Texas) and former treasury officials in sounding the alarm over these regulations.
The regulations, proposed under section 385 of the tax code were sold as a way to stop inversions, however they may actually make the issue worse. They require businesses to disclose extensive information and give the government the authority to reclassify debt as equity for federal tax purposes. Because they are so broad, 385 regulations will likely foster business uncertainty, leading to a chilling effect on investment.
Businesses are already struggling to compete against foreign competitors. As a report by Ernst & Young notes American businesses are vulnerable to acquisitions because our code is far more burdensome that our competitors. Proposing complex new regulations will only make make it even more difficult for American businesses to compete.
The U.S. has the highest corporate income tax rate in the developed world at a steep 39.1%, much higher than the global average of 25%. The U.S. rate is two to three times higher than its direct competitors, like Canada (26.3 percent), the U.K. (20 percent), and Ireland (12.5 percent).
Additionally, the U.S. is only one of six OECD countries that utilizes a worldwide system of taxation. American businesses overseas are required to pay taxes in the country it earned the income in and then pay U.S. taxes on the remaining income, essentially double-taxing American businesses. This system of double taxation puts American businesses at an immense disadvantage, as they are competing with businesses who utilize the more modern territorial system of taxation. Ultimately, the costs of the worldwide system of taxation are passed onto employees, as much as 75 percent of the costs can be passed onto workers.
Instead of imposing countless new regulations, the U.S. should directly address our competitiveness problem through tax reform. Speaker Paul Ryan (R-Wis.) and the House GOP recently released a blueprint on tax reform that would reduce the U.S. corporate rate to 20 percent, which is lower than the global average, and create a territorial system of taxation. If passed into law, these two solutions will halt inversions and ensure our businesses can again compete in the global economy.