The U.S. House of Representatives Republican tax proposal, released Nov. 2, would institute a number of wholesale changes to the American tax code, including the end of neutrality in the international tax system, says an expert on international tax law at Washington University in St. Louis.
“Much has been made of the sweeping domestic tax policy changes under this proposal, and rightly so,” said Adam Rosenzweig, professor of law. “From my perspective, however, the big story is what I would call the ‘death of neutrality’ in the international tax system.”
For almost 100 years, policymakers from all political backgrounds started with the fundamental premise that the goal of the international tax system should be “neutrality” — or to have tax law influence business decisions as little as possible, he said.
“The U.S. tax regime accomplished this by imposing U.S. tax on worldwide income, but subtracting foreign taxes paid on that same income,” Rosenzweig said. “The idea was that removing barriers and distortions to trade and investment would result in faster growth for everyone.”
Now, for the first time, the current bill would explicitly reject neutrality as a premise and instead choose to use tax subsidies and/or penalties in an attempt to force business to stay in the U.S.
“The new proposals are specifically targeted at getting U.S. companies to invest and hire more in the United States.” Rosenzweig said. “These rules intentionally try to influence business behavior, as contrasted to the past where the goal of neutrality was to minimize the influence tax law had on behavior in the name of trade and growth.
“Reasonable people can debate whether such explicit behavioral incentives will be effective in the modern, global economy” he said, “but what is most striking is how much the terms of the debate have changed, and so quickly and with almost no fanfare or attention.”