The European Union took a big bite out of Apple last week, to the tune of $14.5 billion in retroactive taxes. This action did not just mark the latest escalation on the Continent to target U.S. corporations' profits piling up overseas. It also further whet the appetite for corporate tax reform here at home.
Apple alone has a whopping $215 billion in profits stashed overseas, and CEO Tim Cook has indicated that he will wait until Congress restructures the tax code to repatriate his company's money, arguing that the current code would require the tech company to pay more than its "fair share." In the wake of the EU's latest salvo, however, Cook has suggested he intends to repatriate billions back to the U.S. next year. The 35 percent tax that Apple would owe on any repatriated earnings to the U.S. Treasury would be offset by its EU tax liability.
Cook is not the only one to argue that the EU's increasingly aggressive tax collection puts more pressure on the next administration and Congress to tackle reform. Policymakers on both sides of the aisle are concerned that the U.S. could lose a significant potential revenue source if the EU continues to target American companies with substantial earnings parked overseas. After all, the Netherlands has already demanded $34 million from Starbucks, and Luxembourg is investigating Amazon and McDonald's, among other major U.S. firms.
Of course, Democrats and Republicans have different views as to what constitutes paying one's "fair share," particularly when it comes to large corporations. Nevertheless, unlike nearly all other prominent policy issues in play in Washington, corporate tax reform has a considerable overlap of interests across the political spectrum. For example, policy makers on both sides of the aisle agree that inversions, whereby U.S.-headquartered firms re-domicile in more advantageous jurisdictions, are eroding the tax base and need to be stopped.
Additionally, next year's expected House and Senate leadership are on the same page about wanting to make tax reform work.
Sen. Chuck SchumerChuck SchumerVoting rights failed in the Senate — where do we go from here? Forced deadline spurs drastic tactic in Congress Democrats call on Biden administration to ease entry to US for at-risk Afghans MORE (D-N.Y.), a longtime Senate Finance Committee member, is teed up to be the next Senate majority leader, as the Democrats are likely to gain a narrow majority of the upper chamber on Election Day. This would also put Sen. Ron WydenRonald (Ron) Lee WydenOvernight Energy & Environment — High court will hear case on water rule Democrats face scaled-back agenda after setbacks Biden comments add momentum to spending bill's climate measures MORE (D-Ore.), an independent thinker with a penchant for dealmaking, in line to chair the Finance Committee itself. In the House, Speaker Paul RyanPaul Davis RyanHow Kevin McCarthy sold his soul to Donald Trump On The Trail: Retirements offer window into House Democratic mood Stopping the next insurrection MORE (R-Wis.) will likely remain in place, and his handpicked successor to chair the House Ways and Means Committee, Rep. Kevin BradyKevin Patrick BradyOn The Trail: Retirements offer window into House Democratic mood Members of Congress not running for reelection in 2022 Trump war with GOP seeps into midterms MORE (R-Texas), will retain that powerful gavel. Ryan and Schumer have a good working relationship, having almost struck a deal on a repatriation proposal just last year.
Still, it is much easier to block legislation than pass it, and the bigger the legislation, the more special interests exist to create obstacles. Even if an agreement is reached on repatriation, tough compromises would still be needed on thornier topics, such as how to address pass-through entities in which companies are taxed as individuals, which has been the subject of heated partisan rhetoric on the presidential campaign trail in recent weeks.
For tax reform to have a real chance of success once campaigning gives way to governing after Election Day, leaders on both sides of Pennsylvania Avenue will have to muster political courage quickly. A President Hillary ClintonHillary Diane Rodham ClintonThe Armageddon elections to come Poll: Trump leads 2024 Republican field with DeSantis in distant second The politics of 'mind control' MORE will need to make tax reform a legislative priority early in her administration as Senate Democrats will look to her to frame their agenda. And with the Senate Democrats facing a tough electoral map in 2018, they very well could lose their majority only halfway through a Clinton term, meaning they have just 18 months to get something done.
The biggest political variable, though, is Ryan, who has worked long to achieve comprehensive tax reform that includes both corporations and individuals — an objective that is simply a bridge too far in the current hyper-partisan environment. The question remains whether he would be willing to spend the necessary (and considerable) political capital on just corporate reform. The answer to that question likely depends on what ambitions he continues to harbor for higher office and how long he intends to remain Speaker.
Nonetheless, Tim Cook and Apple may be heartened by Speaker Ryan's comments last week about the EU decision: "Above all, this is yet another reason why we need to fix our tax code. ... Today's decision should be a spur to action." Only time will tell, but the outcome of the impending U.S. tax reform effort will ultimately determine which government takes a bigger bite out of more than just Apple.
Myrow is managing partner of Beacon Policy Advisors LLC, an independent policy research firm based in Washington that advises institutional investors on how public policy catalysts will impact the financial markets. He served as a senior official at the Treasury Department under President George W. Bush.
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