In Q and A format, two Lundquist College accounting professors, Linda Krull and Ryan Wilson, joined Dave Anderton of EY for a robust discussion on corporate tax reform at the Fred P. Thompson Lecture on November 9 at the Lillis Business Complex.
The evening started with a discussion about repatriation (or returning funds to their country of origin), a research specialty for Krull.
Krull described how policy makers on both sides of the political aisle see that if we can incentivize firms to bring those earnings back, then we can tax them and the economy will grow, which will then create more tax revenue.
“If you are earning active income (sales) overseas, the U.S. won't tax it until you bring it back," Krull said, noting that more passive types of income, such as interest and dividends, are taxed. “With a high U.S. tax rate and the ability to defer tax, you create this incentive to leave earnings overseas."
When the U.S. tax rate is very high compared to most other developed nations, Anderton added, it incentivizes U.S. companies to source their business operations in those foreign jurisdictions.
“This high rate of U.S. tax is negatively affecting U.S. business," Anderton said. “It has the effect of moving jobs overseas. That's certainly not what we want. In addition, you want to bring that cash back into the U.S. economy."
“The other impact is we are not getting as much foreign investment in the U.S.," he added.
Wilson, also a tax expert, said some of his recent research indicated our unusual current U.S. system is impacting the way firms make decisions. When firms “trap" funds abroad to avoid paying taxes on the earnings—as well as avoiding paying out shareholder dividends—they may make investments they wouldn't otherwise due to the availability of funds.
Added Anderton, “Our U.S. tax system is so complicated. There are a lot of folks who would like to limit the complexity. They would like to simplify it, and they would like to get rid of a lot of the special interests that are getting tax benefits that your average, everyday company isn't getting."
Among the other questions addressed during the Thompson Lecture were:
- Do U.S. firms face a greater tax burden than their peers in other countries due to our very high comparative tax rate? (Depends. The U.S. may have a high tax rate, but it also allows significant deductions. Purely domestic firms actually fare about the same as multinational firms.)
- How have companies like Apple been able to pay very little in taxes on income from foreign subsidiaries? (A combination of mechanisms, including Apple's ability to take deductions in high tax rate countries and recognize income in low tax rate countries, exploiting nuances in U.S. tax laws, and differing definitions of what is a taxable entity and the location of tax residences among various countries.)
Adding some levity to the subject, the question “What is your favorite tax rate?" got a giggle from the crowd.
Krull didn't miss a beat with, “Zero."
Moderator John Chalmers noted this discussion was more technical than previous lectures in the series, and he was pleased to see a great turnout. Chalmers is Department of Finance of head, Abbott Keller Professor of Finance, and academic director of the Cameron Center for Finance and Securities Analysis.
“We are so happy that Fred P. Thompson wanted to make sure that students are exposed to these kinds of deep conversations about how the economy works with experts from all walks of the profession," said Chalmers.
The Department of Finance's Fred P. Thompson Lecture Series semiannually brings academia, business, and government thought leaders to campus to share their views and discuss solutions to vexing problems for the benefit of our students, community, and society.
Those interested in the subject but who could not attend the lecture are invited to watch the video on the college's YouTube channel.