In a letter to President Obama and Congressional leaders, fourteen Democratic Senators urged prompt action on legislation to completely overhaul the US federal tax code along the lines recommended by the final report of the President’s Commission on Fiscal Responsibility and Reform. The letter, written by Senator Mark Warner (D-VA), and signed by 13 others, including Senator Tom Carper (D-DE) a member of the Finance Committee and Senator Diane Feinstein (D-CA), called for legislation to fundamentally reform and simplify the tax code in a way that lowers rates for all taxpayers, increases progressivity, and improves the ability of businesses to compete in the global marketplace, while preserving and improving tax benefits that support home ownership and charitable giving. The Senators thus appear to support an end to LIFO accounting and the adoption of a territorial tax system for foreign-sourced income as recommended by the Commission
Calling the US federal tax code hopelessly confusing and complicated and essentially broken, the Commission, co-chaired by former Clinton Chief of Staff Erskine Bowles and former Senator Alan Simpson, recommended as part of the overhaul of the Code a new corporate tax system with an end to LIFO accounting and the adoption of a territorial tax system for foreign-sourced income. The Commission said that the current corporate income tax system hurts America’s ability to compete. On the one hand, statutory rates in the U.S. are significantly higher than the average for industrialized countries (even as revenue collection is low), and the US method of taxing foreign income is outside the norm.
The U.S. is one of the only industrialized countries with a hybrid system of taxing active foreign-source income, noted the Commission, and the current system puts U.S. corporations at a competitive disadvantage against their foreign competitors. The Commission recommended the adoption of a territorial tax system to put the U.S. system in line with other countries, leveling the playing field.
Thus, to bring the U.S. system more in line with US international trading partners’, the Commission asked Congress to create a new way to tax foreign-source income by moving to a territorial system. Under such a system, income earned by foreign subsidiaries and branch operations, such as a foreign-owned company with a subsidiary operating in the United States, is exempt from their country’s domestic corporate income tax. Under a territorial system, most or all of the foreign profits are not subject to domestic tax. The taxation of passive foreign-source income would not change. It would continue to be taxed currently.
Under the present Code, businesses may account for inventories under the Last In, First Out (LIFO) method of accounting. The Commission recommended eliminating LIFO with an appropriate transition period. President Obama’s 2011 budget also calls for the elimination of LIFO from corporate accounting.