Lots of chatter on corporate tax reform last week.  First, Finance Committee Chair Orrin Hatch gave a speech on the Senate floor making clear that only comprehensive changes to our tax code would help to make our tax treatment of business income more internationally competitive and end the ongoing exodus of US companies to foreign tax jurisdictions.

Well, at the same time, most of the proposals we’ve seen to deal with inversions would amount to building a virtual wall – a wall forged in regulation and punitive tax treatment – around the country to keep companies from leaving and making every business in America – and all of their employees and their individual customers – pay the cost. 

The latest wall-building exercise came earlier this month with Treasury’s temporary anti-inversion regulations and proposed regulations aimed at earnings stripping.

Of course, the administration’s anti-inversion approach was essentially the regulatory equivalent of a doctor who wastes all of his time and energy treating a patient’s symptoms one-by-one as they arise without making any effort to diagnose, let alone treat, the underlying illness.

Senator Hatch makes an important point.  Making it more difficult for US companies to move overseas will not fix the tax code.  That’s the tax policy equivalent of building a Berlin Wall to keep in your citizens.

But this isn’t the Eastern Bloc, and we’re not the Soviet Union.  Fixing the tax code correctly would entail making the United States a more attractive place to invest, so it should start by reducing the marginal cost of investing here.

That is why the Administration’s position of advocating for lower C Corp taxes while pushing for—and enacting—higher taxes on shareholders is so remarkably mindless.  The effective marginal tax on American C Corps is the sum of the two taxes, so cutting one while hiking the other would fail to make the United States a more attractive place to do business!

On the other hand, integrating the corporate code would help dramatically.  That’s the Tax Foundation’s takeaway from their most recent paper on corporate integration. According to the Foundation:

Corporate integration would accomplish many of the same goals as a corporate rate cut, such as making the U.S. business climate more competitive. It could also end several economic distortions created by the current tax code, including the tax preference for debt financing over equity financing.

According to the Tax Foundation, an investment in a partnership or S corporation faces a top federal tax rate of 43.4 percent, while an equity investment in a C corporation faces a rate of 50.5 percent.  The net result is that dividend-paying C corporations investing equity raised from taxable investors are disadvantaged.

Of course, in real life, very little corporate investment is subject to a top rate of more than 50 percent.  Most C corporations do not pay dividends and most C corporation shareholders are tax exempt. C corporations can and do use debt to finance their investments, and larger multinational C corporations have the option of indefinitely keeping their foreign income – and much of their domestic income, if the BEPS project is to be believed — overseas, thus avoiding any US tax at all.

But avoiding the second layer of tax on corporate income by not paying dividends, loading up on debt, and hoarding cash overseas is exactly the type of harmful behavioral affect tax reform should fix.  Building the Berlin Wall of tax codes won’t do it, but integrating the corporate tax code will.

Which brings us to the latest news on Finance Committee Chairman Hatch’s plan to introduce a corporate integration plan this year.  According to our friends at Tax Notes, the Hatch integration plan is going to be budget neutral, would help deter future corporate inversions, and can be expected in June:

Hatch has been telling reporters that he would like to release a draft, after the JCT finalizes the estimates, by the first week of June. But he said on the Senate floor that he hopes the JCT will give his staff “some preliminary results before the end of May.”

Hatch continued to express confidence that he will achieve his goal of making corporate integration revenue neutral, saying in his floor speech that he hopes Democrats will give it a serious look “because this is something we could do this year to help this country resolve its problems with regard to corporate inversions.”

So there you have it – just as some policymakers are calling for building walls and making it more difficult for corporate America to compete, Senator Hatch continues to press forward on a business tax reform idea that would make the US a better place to invest.  It’s a reminder that we won the Cold War not by building walls, but by making our economy more competitive.  Something to keep in mind as we debate tax reform.