In a December 9 report, the Tax Foundation analyzed three tax increases contained within Senator Max Baucus’s (D-Mont.) recent tax reform discussion drafts. Among the revenue-generating measures Sen. Baucus has proposed to help pay for a reduction in the corporate tax rate, the Tax Foundation identified these three as having a retroactive effect:
- the deemed repatriation of certain accumulated foreign earnings,
- the repeal of the current depreciation system (even for existing assets), and
- the repeal of the last-in-first-out accounting method of inventory accounting.
The Tax Foundation expresses skepticism that these measures will generate the revenue anticipated. Calling the proposed increases “substantial” and “unexpected,” the report raises concerns that some taxpayers will lack the financial resources to pay, and concerns that the increases will cause future economic distortions and inefficiencies, as corporate taxpayers modify their behavior to mitigate the risk of future retroactive tax increases. The report concludes as a general matter that retroactive tax increases have more disadvantages than advantages.
Retroactive effect notwithstanding, the idea of a deemed repatriation of accumulated foreign earnings appears to have broad bipartisan support. Representative Dave Camp’s (R-Mich.) October 2011 international tax discussion draft also provides for deemed repatriation. Rep. Camp’s proposal, which is not mentioned in the Tax Foundation report, would function similarly to Sen. Baucus’s proposal, but would tax accumulated foreign earnings at a lower rate.