Evans & Novak

Foreign Tax Code: Rep. Bill Thomas (R.-Calif.), chairman of the House Ways and Means Committee, has proposed a bill to address two aspects of U.S. foreign tax law that have come under criticism: export subsidies and offshore tax havens.

1) The World Trade Organization (WTO) ruled in January that the United States' Extraterritorial Income Exclusion Regime (ETI) laws constituted an export subsidy and violated WTO trade rules. Like its predecessor, the Foreign Sales Corporation (FSC) laws, ETI taxed American companies less for their exports than for domestic sales.

President Bush, who has promised he would not raise taxes, could not simply repeal ETI to appease the WTO, because that would amount to a corporate tax hike. Conservatives have urged Thomas to use the WTO ruling as a reason to overhaul the foreign tax code.

3) Thomas, in late June, proposed a measure that would help foreign subsidiaries of U.S. companies claim exemptions and deferrals of income-preventing the U.S. from taxing these corporations that are already being taxed by foreign governments. Simultaneously, it would end the tax credit some companies receive on profits from U.S. exports.

In short, U.S. exporters would lose some benefits while foreign subsidiaries of American companies (whether they export or not) would gain. This runs the risk of encouraging exporters to shift their production overseas.

4) The other aspect of Thomas's bill addresses the now high-profile issue of corporate inversions. Thomas would try to address the problem of "earnings stripping"-a maneuver by which U.S. subsidiaries of foreign companies reduce their taxable income by deducting interest payments to their foreign-based parent company The bill would limit the interest these subsidiaries could deduct for such intracompany transactions. It would also try to ensure that companies pay taxes when they move headquarters overseas.

5) Republicans feel the need to address these issues as a way of defusing Democratic attacks that the GOP is in the pocket of corrupt big business. Democrats are confident they can take advantage of growing public distrust for corporations this election year.

Democratic: The Memphis "retreat" by former Vice President Al Gore's loyal supporters did not allay doubts about him inside the Democratic Party.

1) Gore's frontal attack on Bush, far tougher than that any of the other prospective '04 presidential hopefuls (and including even criticism of his war policy), is the only way he can run for president. That is not an advantage.

2) Gore's attack on "consultants" for causing his defeat in '04 was interpreted as an attack on Bob Shrum, who has not been close to him since the 2000 election. It did not enhance confidence in Gore by party operatives.

3) Gore remains the heavy favorite to be nominated if he runs, but there are Democratic insiders who predict it will never happen-based in part on his performance in Memphis.

Watts Retirement: The retirement of House Republican Conference Chairman J.C. Watts (Okla.) has led to widespread shakeup and speculation:

1) After House Majority Leader Dick Armey (Tex.) announced his retirement last December, Majority Whip Tom DeLay (Tex.) sealed up the bid to replace him nearly instantaneously. Also, Chief Deputy Whip Roy Blunt (Mo.), with DeLay's endorsement, locked up the whip pot almost before other contenders could move.

Accordingly, candidates for the No. 4 leadership post held by Watts have made early moves. Before Watts even made his announcement, Rep. J.D. Hayworth. (Ariz.) had assembled a 10-man task force to push his candidacy for the role. The front-runner, however, may be Rep. Deborah Pryce (Ohio). Rumors on Capitol Hill say that DeLay has quietly thrown his support to Pryce, which upsets conservatives who are more likely to get behind Hayworth. Rep. Jim Ryun (Kan.) is also running for the spot

2) While Watts never faced a serious challenge for re-election, his is hardly a safe Republican seat. About 68% of the voters in this district are registered.Democrats. But they are Dixie Democrats: 61% pulled the lever for Bush in 2000.

The leading contender in this district is political power-broker and former Oklahoma Secretary of State Tom Cole (R). Cole played a key role in getting Watts elected in 1994, and has deep political roots and deep pockets. Also in the running for the GOP nod are veteran political operative Marc Nuttle and State Sen. Kathleen Wilcoxson. Leading Democratic contenders are former House Speaker Loyd Benson and attorney Keith Butler. Republicans have the edge, but with the registration advantage Democrats have a shot for a takeover.

This special report appears exclusively in HUMAN EVENTS. For subscription information on the Evans-- Novak Political Report, call 800-789-5367.

Copyright Human Events Publishing, Inc. Jul 15, 2002
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