There is no Such Thing as a Technical Correction

There is no Such Thing as a Technical Correction

There is no such thing as a technical correction when it comes to tax law.

The Ways and Means Committee of the United States House of Representatives was about to act on a bill that would have had a significant effect on tax law.

If enacted, it would have changed the effective tax rate available to U.S. exporters under a provision of law known as the Interest Charge-Domestic International Sales Corporations (IC-DISC) that effectively set a maximum tax rate of 15 percent on the income from manufactured products that are exported.

Spokesmen for the committee explain that the IC-DISC was never intended to have the favorable tax rate of 15 percent. They argue that the 15 percent was a mistake that occurred back in 2003, during the mark-up of the “American Jobs Creation Act,” when Congress was under pressure from the European Union to change an earlier tax break that encouraged U.S. companies to export (the FSC-ETI). Without the IC-DISC, exports would be taxed no differently than any other manufactured product – at 35 percent.

Like Sigmund Freud, I believe that there is no such thing as an accident. When the 2003 tax act finally passed, the legislation had been more than a year in the making. The Treasury Department had reviewed it. The Joint Committee on Taxation had reviewed it. The staff of both committees of jurisdiction reviewed it. None of the reviewers apparently objected to the lower rate for the IC-DISC. It may now seem like a mistake to some, but it was not considered as such by those who reviewed the bill five years ago.

The Congressional tax-writers claimed that they never intended to include the IC-DISC within the scope of taxes that benefited from the new 15 percent capital gains tax rate enacted under the 2003 tax bill. But they did include it, and American companies have planned their international activities on the basis of that incentive.

A particular irony of repealing the tax benefit of the IC-DISC in the current environment would have been that the one area of the economy that has kept the United States from slipping into recession during the past year is vigorous growth in the export market. While the sub-prime mortgage crisis and the resulting credit crunch have threatened to plunge the country into recession, the one saving economic grace has been exports. How else does one explain a third quarter growth rate of 4.9 percent?

Now this Congress, in the name of bookkeeping, threatened to take away one of the few incentives that predominantly small U.S. businesses have to increase their export market share. It would have made the books look a little better, but it was bad tax policy. Moreover, the motivation to undermine this provision was baffling. Unlike the earlier repeal of export incentives, there is no World Trade Organization decision forcing us to revise our laws. There are no foreign governments threatening retaliation. We were doing this to ourselves.

Beyond the overall adverse impact of this proposed action, repeal of the IC-DISC tax rate would have particularly hit small businesses, many of whom have seen a decline in their domestic market from increased foreign competition.

Fortunately, in a last minute reprieve, Congress failed to act – although this is likely to return as an issue in 2008. Hopefully, lawmakers will understand that small businesses have relied on the IC-DISC structure to help offset the disadvantages that they encounter when competing against sometimes heavily subsidized foreign competitors.

The 15 percent tax rate allows them to have the financial resources to channel to the export efforts of their businesses. It is a valuable weapon in the fierce competition for export markets.

The new Democratic Congress came into power with a pledge to shake things up and to balance the books. But there was no mention that the books might be balanced on the backs of the exporting community. There are many examples of wasteful spending and counterproductive tax policy.

The IC-DISC is not one of them.

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