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Introduction
America’s system of business taxation is in need of reform. The United States has a relatively narrow
corporate tax base compared to other countries—a tax base reduced by loopholes, tax expenditures, and
tax planning. The resulting system distorts choices, such as where to produce, what to invest in, how to
finance a business, and what business form to use. And it does too little to encourage job creation and
investment in the United States while allowing firms to benefit from incentives to locate production and
shift profits overseas. The system is also too complicated—especially for America’s small businesses.
In 2012, the White House and the Treasury Department released The President’s Framework for Business
Tax Reform, outlining the need for reform of the business tax system and presenting the five elements of
reform as envisioned by the President: eliminating loopholes and subsidies to broaden the base and lower
the rate, strengthening American manufacturing and innovation, strengthening the international tax
system, simplifying and cutting taxes for America’s small businesses, and restoring fiscal responsibility
without adding to the deficit. Since then, Members of Congress from both parties have put forward
thoughtful tax reform proposals, including former House Ways and Means Committee Chairman Dave
Camp and former Senate Finance Committee Chairman Max Baucus. Last year, a number of Senate
Finance Committee working groups continued the reform effort, releasing a set of reports on different
topics in tax reform. While the Administration does not agree with every component of these proposals,
all of these efforts have underscored the need for and the urgency of business tax reform and advanced
the discussion in meaningful ways.
The urgency of closing loopholes and reforming the tax system more broadly has grown since the
Framework was released in 2012. Particularly notable is the recent wave of corporate inversions,
transactions in which a U.S. corporation shifts its legal residence abroad to be deemed a foreign company
for U.S. tax purposes, even as it frequently keeps management and business operations here. The
Congressional Research Service identified 23 inversions since 2012, compared to only three in total in
2010 and 2011. In September 2014, the Treasury took action to limit companies’ ability to undertake these
transactions and reduce the economic benefits of inversions, a step that observers have credited with
slowing the pace of inversions, and followed up with further steps in November 2015 and April 2016.
However, a complete solution to the problem requires Congressional action. The President’s Budget has
proposed to stop corporate inversions and shut down a key strategy inverted firms use to shift taxable
income outside the United States, but Congress has failed to act on these proposals. As a result, inversions
continue to erode the U.S. tax base unnecessarily.
While inversions are a particularly prominent symptom of a broken tax system, and one that should be
addressed immediately even absent broader business tax reform, the issues run much deeper. Even
without changing the address on their tax returns, corporations can shift profits to low-tax countries in
order to reduce their worldwide tax liability. Academic research suggests that the cost of profit shifting
has increased substantially in recent years and may now cost the United States more than $100 billion per
year in foregone tax revenue. The global importance of this issue is highlighted by the successful
development of comprehensive recommendations to address base erosion and profit shifting (BEPS) by
the OECD BEPS Project, which were approved by the G-20 nations in November.
In the face of these challenges, inaction is not an option. The combination of the relatively high U.S.
corporate rate and our complicated system for taxing multinational businesses has encouraged and