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Jan 4:
S. 96. A bill to amend the Internal Revenue Code of 1986 to ensure a fairer and simpler method of taxing controlled foreign corporations of United States shareholders, to treat certain foreign corporations managed and controlled in the United States as domestic corporations, to codify the economic substance doctrine, and to eliminate the top corporate income tax rate, and for other purposes; to the Committee on Finance.
Mr. KERRY. Mr. President, today I am introducing the ``Export Products Not Jobs Act.'' Our tax code is extremely complicated. In 1994, the IRS estimated that a family that itemized their deductions and had some interest and capital gains would spend 11 1/2 hours preparing their Federal income tax return. A decade later in 2004, this estimate increased to 19 hours and 45 minutes. It is time for Congress to pass bipartisan tax legislation in the style of the Tax Reform Act of 1986, which greatly simplified the tax code. And our tax reform should be based upon the following three principles: fairness, simplicity, and opportunity for economic growth.
Citizens and businesses struggle to comply with rules governing taxation of business income, capital gains, income phase-outs, extenders, the myriad savings vehicles, recordkeeping for itemized deductions, the alternative minimum tax (AMT), the earned income tax credit (EITC), and taxation of foreign business income. I believe that our international tax system needs to be simplified and reformed to encourage businesses to remain in the United States. And today, I am introducing legislation that I hope will be fully considered as we continue our discussions on tax reform.
Presently, the complexities of our international tax system actually encourage U.S. corporations to invest overseas. Current tax laws allow companies to defer paying U.S. taxes on income earned by their foreign subsidiaries, which provides a substantial tax break for companies that move investment and jobs overseas. Today, under U.S. tax law, a company that is trying to decide where to locate production or services--either in the United States or in a foreign low-tax haven--is actually given a substantial tax incentive not only to move jobs overseas, but to reinvest profits permanently, as opposed to bringing the profits back to re-invest in the United States.
Recent press articles have revealed examples of companies taking advantage of this perverse incentive in our tax code. For instance, some companies have taken advantage of this initiative by opening subsidiaries to serve markets throughout Europe. Much of the profit earned by these subsidiaries will stay in the European countries and the companies therefore avoid paying U.S. taxes. Other companies have announced the expansion of jobs in India. This reflects a continued pattern among some U.S. multinational companies of shifting software development and call centers to India, and this trend is starting to expand include the shifting critical functions like design and research and development to India as well. Some companies are even outsourcing the preparation of U.S. tax returns.
The Export Products Not Jobs Act would put an to end to these practices by eliminating tax breaks that encourage companies to move jobs overseas and by using the savings to create jobs in the United States by repealing the top corporate rate. This legislation ends tax breaks that encourage companies to move jobs by: 1. eliminating the ability of companies to defer, paying U.S. taxes on foreign income; 2. closing abusive corporate tax loopholes; and 3. repealing the top corporate rate. It removes the incentive to shift jobs overseas by eliminating deferral so that companies pay taxes on their international income as they earn it, rather than being allowed to defer taxes.
Last Congress, the Ways and Means Subcommittee on Revenue held a hearing on international tax laws. Stephen Shay, a former Reagan Treasury official, testified that our tax rules ``provide incentives to locate business activity outside the United States.''
Furthermore, he suggested that taxation of U.S. shareholders under an expansion of Subpart F would be a ``substantial improvement'' over our current system. The Export Products Not Jobs Act does just that.
Our current tax system punishes U.S. companies that choose to create and maintain jobs in the United States. These companies pay higher taxes and suffer a competitive disadvantage with a company that chooses to move jobs to a foreign tax haven. There is no reason why our tax code should provide an incentive that encourages investment and job creation overseas. Under my legislation, companies would be taxed the same whether they invest abroad or at home; they will be taxed on their foreign subsidiary profits just like they are taxed on their domestic profits.
This legislation reflects the most sweeping simplification of international taxes in over 40 years. Our economy has changed in the last 40 years and our tax laws need to be updated to keep pace. Our current global economy was not even envisioned when existing law was written.
My Export Products Not Jobs Act will in no way hinder our global competitiveness. Companies will be able to continue to defer income they earn when they locate production in a foreign country that serves that foreign country's markets. For example, if a U.S. company wants to open a hotel in Bermuda or a car factory in India to sell cars, foreign income can still be deferred. But if a company wants to open a call center in India to answer calls from outside India or relocate abroad to sell cars back to the United States or Canada, the company must pay taxes just like call centers and auto manufacturers located in the United States.
Currently, American companies allocate their revenue not in search of the highest return, but in search of lower taxes. Eliminating deferral will improve the efficiency of the economy by making taxes neutral so that they do not encourage companies to overinvest abroad solely for tax reasons.
The Congressional Research Service stated in a 2003 report that, ``ccording to traditional economic theory, deferral thus reduces economic welfare by encouraging firms to undertake overseas investments that are less productive--before taxes are considered--than alternative investments in the United States.'' Additionally, a 2000 Department of Treasury study on deferral stated, ``mong all of the options considered, ending deferral would also be likely to have the most positive long-term effect on economic efficiency and welfare because it would do the most to eliminate tax considerations from decisions regarding the location of investment.''
The ``Export Products Not Jobs Act'' would modify the rules for determining residency for publicly-traded companies by basing a corporation's residence on the location of its primary place of management and control. This will prevent companies from locating in tax havens, but basically maintaining their operations in the United States. This provision should not hinder foreign investment in the United States. Existing companies that are incorporated in foreign countries with a comprehensive tax treaty with the United States will not be affected by this provision.
Massachusetts is an example of a state that benefits from foreign investment. Two foreign companies have recently expanded investment in Massachusetts. Our tax system should not discourage foreign investment, but it should not encourage companies to locate in tax havens.
The revenue raised from the repeal of deferral and closing corporate loopholes would be used to repeal the top corporate tax rate of 35 percent. The tax differential between U.S. corporate rates and foreign corporate rates has grown over the last two decades and the repeal of the top corporate rate is a start in narrowing this gap.
The Export Products Not Jobs Act would promote equity among U.S. taxpayers by ensuring that corporations could not eliminate or substantially reduce taxation of foreign income by separately incorporating their foreign operations. This legislation will eliminate the tax incentives to encourage U.S. companies to invest abroad and reward those companies that have chosen to invest in the United States. I urge my colleagues to join me in this effort, and I ask unanimous consent that summary of the Export Products Not Jobs Act, as well as the text of the legislation, be printed in the RECORD.
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