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168 IRET Congressional Advisory 1 (2004)

handle is hein.taxfoundation/iretcgadv0165 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. March 22, 2004 Advisory No. 168 ETI REPEAL SHOULD BE PASSED AND MOVED TO CONFERENCE The House and the Senate are trying to move, however slowly, to resolve the international legal problems created by the World Trade Organization (WTO) ruling that the Extraterritorial Income (ETI) provision of the U.S. tax code constitutes an illegal export subsidy. Under the WTO ruling, the European Union (EU) has begun gradually to impose countervailing duties on selected U.S. exports, and these duties will increase each month up to a $4 billion annual rate until the United States repeals the ETI provisions. The House is refining the revenue offsets to be added to the Ways and Means bill, and the Senate is working on procedures relating to the Finance Committee version, with an eye toward floor votes this month. It is important to get the bills to conference to resolve differences and to get this issue behind us. Both bills repeal the ETI and adopt some additional revenue raisers. Both use the majority of the money to reduce tax rates on U.S. manufacturing, and both use much of the rest to ease and simplify the punitive and complicated U.S. tax treatment of foreign source income. However, the structure of the Senate tax rate relief for manufacturing has an odd protectionist twist, and should be abandoned in favor of the House version. In addition, the House bill does a better job of putting U.S. firms on an equal footing with their foreign competition when operating in Europe and around the world. Bills provide tax rate relief for manufacturing. The House bill phases in a lower 32 percent corporate tax rate on U.S. source manufacturing income of firms of any size by 2007. It also phases in a 32 percent corporate rate for all corporations, manufacturing or not, with less than $20 million in income by 2012. The House bill also addresses certain unrealistic depreciation schedules, expands the size of companies exempt from the AMT and ends the 90 percent limitations on the use of net operating losses and foreign tax credits against the AMT. The Senate bill provides a maximum reduction in the top corporate tax rate to 31.5 percent for manufacturing firms by excluding ten percent of U.S. source manufacturing income from tax (cutting 3.5 percentage points off the 35 percent corporate tax rate). Non-corporate manufacturers get the same exclusion. Note that the rate reduction only applies to U.S. source income. In addition, however, the Senate bill's exclusion would be reduced for firms with foreign income. It could be taken only in proportion to the ratio of U.S. to global earnings of the company. For example, a firm with 60 percent U.S. income and 40 percent foreign income would get to exclude only 6 percent of its U.S. manufacturing income from tax. That would reduce its rate reduction to 2.1 percentage points, and its effective tax rate would be 32.9 percent. This further restriction in the rate cut, when the rate cut was already restricted to U.S. source S I gg~ g

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