Manufacturers in the United States were taken aback this weekend when word leaked out that the senior Senator from New York and long-time member of the Finance Committee –Chuck Schumer (D)—is floating a tax increase proposal that would actually reach back 20 years to discriminate against certain businesses that play a critical role in the U.S. economy. While it appears that the Senator’s goal is to discourage recent M&A activity in the international arena (aka inversions), the proposal would actually discourage important foreign direct investment in the United States and set a dangerous precedent for changing tax rules mid-stream, injecting even more uncertainly in our nation’s shaky tax system.
Specifically, what Sen. Schumer’s proposal would do is significantly limit interest deductions for some non-U.S. domiciled companies that were headquartered in the United States at some point in the past 20 years. In laymen’s terms, this would be similar to limiting the deduction for a homeowner’s mortgage interest depending on where they were born. In both cases, it adds up to discriminatory tax policy. At the same time, adopting this revisionist approach to tax policy would open to door to similar proposals affecting other tax deductions and other groups of tax payers, and promulgating even more uncertainty in our uncertain times.
The proposal from Sen. Schumer seems to disregard the very important role that foreign direct investment plays in the U.S. economy and discriminates against non-U.S.-headquartered companies that play an important role in the U.S. economy. Indeed, U.S. subsidiaries of foreign companies employ more than 2 million U.S. workers, over 17 percent of America’s manufacturing workforce. The ability to deduct interest expense is a critical factor in a company’s decision to invest and create jobs in the United States.
As we’ve noted many times before, the NAM believes that recent M&A activity highlights the critical need for a comprehensive overhaul of the U.S. tax system to reflect the global marketplace of the 21st century. In short, the answer is comprehensive tax reform, not punitive tax treatment of foreign-owned companies.
Dorothy Coleman is the Vice President for Tax and Domestic Economic Policy at the National Association of Manufacturers.