JEB BUSH AND SCHRÖDINGER’S TAX

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On Sept. 9, former Florida governor and GOP presidential hopeful Jeb Bush released an outline of the tax plan he would pursue if elected. The plan included deep rate cuts for both individuals and corporations—long a goal of the conservative movement—as well tweaks to current tax policies affecting wealthy earners, seen by many as a concession to the populist fury being drummed up by Bush’s main rival, one Donald J. Trump.

Bush’s plan would also overhaul international taxes, transitioning the U.S. from a worldwide tax system, which taxes global profits of local corporations, to a territorial system, which taxes only profits generated by economic activity within the U.S. This, also a long-time conservative goal, would end the current incentive for corporations to keep foreign earnings deferred from their shareholders as long as possible in order to avoid the relatively high U.S. corporate tax rate of 35 percent. But for the earnings already accumulated, Bush would force that money home—at a discounted rate of 8.75 percent.

This is not a unique part of Bush’s plan. Many tax proposals—conservative and otherwise—include some kind of transition to deal with the $2.1 trillion of earnings U.S. corporations currently have deferred abroad, as part of a move towards a future system in which deferral is either illegal or unnecessary. Without some transition, U.S. corporations would face a bookkeeping nightmare.

What to do with this windfall is a trickier question, and has more to do with politics than accounting. What is it, even—a tax cut or a tax hike? Depending on how you look at it, it could be either one, which complicates the political calculation.

A forced repatriation is a tax hike in the sense that it imposes an immediate tax on the repatriated earnings, whereas current law delays that payment, perhaps indefinitely. Grover Norquist, president of the advocacy group Americans for Tax Reform and considered a papal authority on these matters in conservative political circles, has made it clear he views it this way. Thus, any legislation that includes such a transitional tax and isn’t offset by a tax cut elsewhere is in violation of Norquist’s famous pledge for conservative elected officials not to raise taxes.

Others see it quite differently. Were those earnings to be repatriated now, they’d face a 35 percent tax (minus whatever tax credits they receive for foreign taxes already paid). So to grant a much lower 8.75 percent rate can be seen as a massive tax cut for large multinational corporations--some of whom may well have planned to bring the money home anyway. The nonprofit advocacy group Citizens for Tax Justice likens it to a reward for “corporate tax dodgers.” 

It calls to mind Schrödinger’s famous cat, the fictitious feline victim of a 1935 thought experiment that left it simultaneously alive and dead due to the weirdness of quantum mechanics. Call it Schrödinger’s Tax.

It gets even more complicated when it comes to estimating the revenue costs or benefits of these proposals. (Bush’s plan doesn’t have a formal score yet, but his economic advisers released a paper estimating that it would reduce federal revenues by $3.4 trillion over a decade, and $1.2 trillion if “dynamic scoring,” or estimated growth in the economy due to the tax cuts, is included.) Many tax reform plans, such as the one former Rep. Dave Camp (R-Mich.) unveiled in 2014, aim to be “revenue neutral.” But revenue neutrality is often based on scores from authorities such as the Joint Committee on Taxation, which uses a 10-year timeframe for its estimate. What about after those 10 years—when the one-time revenue windfall from a deemed repatriation will have long been spent? Can the tax law still claim to be revenue neutral?

U.S. international tax policy is filled with little paradoxes like this, all due to the oddness of a system that sets up the expectation that international taxes will be paid, but then doesn’t require it. Many corporations themselves probably don’t know what they’ll do with these earnings in the long term. Almost everyone agrees that the situation is absurd, and there are plenty of proposals for altogether new systems that would fix it. How to get there, though, remains the hard part.