Corporate Time-Shifting in the Trade Preferences Extension Act of 2015:  Evidence of Fiscal Divination or Abuse of the Tax Code for Political Expediency?

Chances are you’ve never heard of the Trade Preferences Extension Act of 2015.  If you have, chances are you haven’t read it.  If you have, chances are you’re either a professional working in tax or trade compliance or a masochist (but almost certainly not a politician).  As a member of the former group, a particular section of the law stood out to me as odd; Section 803 of the bill states:


"Notwithstanding section 6655 of the Internal Revenue Code of 1986, in the case of a corporation with assets of not less than $1,000,000,000 (determined as of the end of the preceding taxable year)—

(1) the amount of any required installment of corporate estimated tax which is otherwise due in July, August, or September of 2020 shall be increased by 8 percent of such amount (determined without regard to any increase in such amount not contained in such Code); and

(2) the amount of the next required installment after an installment referred to in paragraph (1) shall be appropriately reduced to reflect the amount of the increase by reason of such paragraph."


In plain English, the effect of this section of the bill is to increase the amount that large corporations must pay in estimated taxes in the third quarter of 2020 and then reduce them by the same amount the following quarter. The total amount taken in by the government between these two-quarters is a wash; the effect is merely to pull 8% of the taxes forward one-quarter. The specificity in timing (5 years in the future) and amount of such an adjustment led me to question the motivations behind its inclusion in the bill.


At first glance, it might appear that whoever included this provision has a window to the future, and instead of using this remarkable insight for nefarious purposes or personal financial gain, they decided to temporarily increase the Treasury’s tax revenues in order to cope with the Great Budget Shortfall of Q3 2020.  Obviously, however, this isn’t the reason why Congress is playing Thimblerig with corporate tax revenues.


The real reason is far less altruistic and only slightly less ridiculous.


Statuatory Pay-As-You-Go Act


In 2010, President Obama signed the Statutory Pay-As-You-Go Act, which reinstated budgetary rules that require certain bills to be deficit neutral at both 5 and 10 years from the date of passage.  The idea of PAYGO is to force Congress to pay for its spending with funds that are currently available rather than borrowed.


However, by pulling billions from corporations in the third quarter (the last quarter of the budget year) of the fifth year after the bill’s passage and then returning the money the following quarter, Congress is effectively able to circumvent the rules in place to control deficit spending for up to 10 years after a bill’s passage.


By delaying offsets for the spending until years after the money has already been spent, politicians end up generating billions in interest liabilities alone (interest which is conveniently not counted towards the PAYGO deficit-neutrality scorecard).


The bottom line is that Congress is playing both sides of the coin (pardon the pun).  On the one side, congressional members can tout that they’re practicing fiscal responsibility by constraining the legislature’s ability to add to the deficit.  On the other side of the coin, they can continue to spend money they don’t have and use the tax code to cover their tracks.


As the changes to the tax code only affect a relatively small number of the country’s businesses – those that are likely to have scores of employees working in tax compliance – there has not been any significant rebuke of Congressional use of corporate time-shifts, and the public is left largely unaware.


The practice of nonchalantly manipulating provisions of the tax code affecting billions in corporate revenue, not for the purpose of raising revenue but for political expediency, is indicative of a broader shift in Congressional mindset away from providing for the general welfare of the United States and towards the maintenance of the status quo on Capitol Hill.  Without a shift in the Congressional zeitgeist, such abuses of the tax code are likely to continue, costs of tax compliance will continue to rise, and the national debt will continue to grow hand-in-hand with an already voluminous tax code.