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Twenty-Five Years Since Last Revision
By Children’s Home Society of Florida Foundation
On February 22nd 2012, Treasury Secretary Timothy Geithner spoke to Congress and outlined the White House proposal for corporate tax reform. Geithner noted that there has not been a comprehensive corporate tax reform for 25 years. Since the last major corporate tax reform, there have been many significant events. These include the following changes.
- Internet is widely used.
- Cell phones are now common place.
- China and India have become significant economies.
- Global trade has greatly expanded.
- Nearly all other industrial societies have lowered their corporate rates.
The Five Elements of Reform
- Reduced Rates – The elimination of tax loopholes and subsidies will permit a reduction of the corporate tax rate from 35% to 28%.
- Manufacturing Incentives – The effective tax rate for manufacturing companies will be reduced to 25% through incentives.
- International Taxation System – Companies could pay penalties for shifting income overseas.
- Simplification – Small businesses would benefit from reduced complexity in the Tax Code.
- Revenue Neutrality – The reduced rates are achieved through eliminating various tax deductions.
Assessment
Treasury Secretary Geithner indicated that he plans to meet with Senate Finance Chair Max Baucus (D-MT) and House Ways and Means Chair Dave Camp (R-MI). He hopes that it will be possible to build a bipartisan consensus for corporate tax reform.
Editor’s Note: Sen. Baucus and Chairman Camp have been holding hearings and proposing corporate tax reform for the past year. With the White House announcement, that the President, the House and the Senate agree that there should be simplification and a lower corporate top rate. The challenge will come when the government grapples with the question of which major corporate deductions (such as bonus depreciation) will actually be removed in order to lower rates. Because of the magnitude of major tax reform, it is not likely that an actual bill could be passed before 2013.
Conclusion
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Filed under: Taxation | Tagged: Dave Camp, IRS, Max Baucus, obama, tax reforn, Timothy Geithner, Treasury Secretary, White House, White House Proposes Corporate Tax Reform |
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Congress Welcomes Debate on Tax Reform
In response to the White House, many members of Congress welcomed the debate on tax reform.
Both the House Ways and Means Committee and the Senate Finance Committee have held multiple hearings on tax reform. At the hearings, witnesses observed that the United States has an average state and local tax rate on corporations of up to 39%. This is approximately 15% higher than the average rate of other industrial countries.
Since 2000, most of the other major industrial countries have reduced tax rates from 5% to 15%. The reduced rates are designed to make the companies competitive in a global economy and to retain jobs at home. Because the U.S. has a high corporate tax rate, there is an incentive for companies to move jobs overseas.
Democratic leaders were supportive of the President. Rep. Nancy Pelosi (D-CA) stated, “President Obama’s proposal presents a clear opportunity to work in a bipartisan manner to lower tax rates on American businesses and corporations while closing loopholes for Big Oil and companies that ship jobs overseas.”
The Ranking Member on the House Ways and Means Committee is Rep. Sander Levin (D-MI). He “applauded” the President for setting forth a series of goals for corporate tax reform. Levin noted, “The Administration has put the focus of corporate tax reform where it needs to be: on promoting investment, job creation and especially manufacturing in the United States, not overseas.”
Republican leaders were generally pleased that the White House had issued a proposal. However, they expressed hope that there would be more specifics to the Treasury plan. Ranking Member of the Senate Finance Committee Orin Hatch (R-UT) noted that the major tax overhaul signed by President Reagan in 1986 was the result of “three long years” of effort. The actual major overhaul of corporate and personal taxes together is a huge undertaking.
Hatch stated, “America’s tax system is broken to the point that it’s putting our nation at a competitive disadvantage around the world. I’d hoped the White House would recognize the severity of the problem with a real plan and real leadership.” Sen. Hatch called the proposal “profoundly disappointing in its lack of detail.” He hopes that the White House and Treasury Secretary Geithner will work with the Republicans on a meaningful tax reform. He indicated that this level of effort would find “willing and able partners in Congress.”
A key member of Congress for tax reform is the Chairman of the House Ways and Means Committee, this committee is required to initiate all major tax legislation. Chairman Dave Camp (R-MI) noted that he appreciated the White House proposal. Camp stated, “There is a clear and growing consensus that our outdated tax code is hindering the job creation this country needs to get Americans back to work and it must be reformed so that the United States would be a more attractive place to invest and hire.”
Camp and Sen. Ron Wyden (D-OR) also expressed a bipartisan concern that it is not possible to have major corporate tax reform without also reforming personal income taxes. Camp noted, “More than half of all business income is taxed at the individual (rather than corporate) tax rates and a corporate-only proposal does not address the needs of those job creators.”
Wyden has previously been involved in bipartisan tax proposals. He agreed and stated, “Right now, more than 80% of all U.S. businesses are filing their taxes through the individual tax code, not the corporate tax code. Those businesses would see little benefit from this proposal.”
Editor’s Note: It is positive that the House and Senate tax writers and the White House have all published proposals. If Sen. Wyden and Chairman Camp persuade Congress that tax reform must include both corporate taxes and personal taxes, then the process will be quite extensive. However, there is general agreement that broadening the tax base through reducing deductions and reducing rates at the same time will be beneficial.
Source: Children’s Home Society of Florida Foundation
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Should Small Business Owners Pay More Tax?
At a House Ways and Means Committee hearing on March 7, witnesses discussed the White House proposal to increase the top income tax rate to 39.6%. Because many owners of small businesses pay tax at higher individual rates, the question centered on the impact of the higher tax rate on job creation.
Ways and Means Chair Dave Camp (R-MI) opened the discussion by noting that it is important to create a tax code that does not tilt “too much in any one direction.” If the tax code for small businesses favors large corporations over limited liability companies and other flow-through entities, it will cause unfavorable results. Camp suggested that the best policy is “to create a neutral tax code in which the individual tax rates are similar to the corporate rates.”
Previously, Camp and other Republicans introduced legislation that proposes a top rate of 25% for both individuals and corporations. This proposed reduction in the top rates will require elimination of many business and itemized deductions.
Camp referred to a study by the Congressional Joint Committee on Taxation. It indicated that 56% of business income and 54% of small business jobs were found in small business partnerships, subchapter S corporations and limited liability companies. These are all called “pass-through entities.”
The White House has proposed increasing the individual rate to 39.6% and reducing the top corporate rate to 28%. The proposed reduction in the top corporate rate is an effort to boost employment. At present, the U.S. is the country with the highest corporate rate among first-world nations.
Camp objected to the White House plan to have a personal rate of nearly 40% and a corporate rate of 28%. He suggested that a 12 percentage point difference in the two rates “will create more harm than good.”
Ranking Ways and Means Member Sander Levin (D-MI) agreed that a good tax plan should “promote economic growth and job creation.” He also stated that the pass-through entities account for approximately half of business income and provide half of business jobs.
Levin explained that the basic question is “whether to continue the upper-income Bush tax cuts.” In his view, only 8% of the expected increase in revenue from the higher personal tax rate would be from “small business employers.”
Levin continued with the suggestion that most of the partnership income comes from very substantial partnerships. At least 64% of total partnership income is earned by partnerships with over $100 million in assets.
Finally, Levin agreed that there is a major problem with complexity of taxes for small businesses. He hopes a future major tax reform bill can resolve the issue of tax complexity.
Source: Children’s Home Society of Florida
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Treasury Secretary Promotes Revenue Increase
On March 15th 2012, Treasury Secretary Timothy Geithner spoke to the Economic Club of New York. Sec. Geithner discussed the improving economy, the challenges that remain and proposed revenue increases to help the USA achieve fiscal sustainability.
In Geithner’s view there are a number of positive economic factors. During the past two years, 3.9 million jobs have been created. Business investment has increased 33% and exports are up 25%.
American households have been reducing debt for the past 3 years. Household saving rates were near zero in 2007, but now have increased to 4.5% of income.
The total output of the economy is now close to the pre-crisis peak. As a result, deficits are starting to trend lower, although they still are in excess of $1 trillion per year.
Geithner then moved on to the challenges facing America. Unemployment is still “very high and is improving more gradually than any of us would like.” The unemployment rate continues to be over 8% and is moving down quite slowly.
Housing remains quite weak. There is a very low level of new residential construction. Home prices have declined in many parts of the country and home equity is down substantially.
Finally, the economy has grown at a much slower rate than most other recessions. During the first 2 ½ years following the recession of 2009, the economy grew at a much slower rate than in prior recessions.
Geithner then suggested the solutions that are needed for fiscal sustainability. In his view, a combination of $4 trillion in budget reductions and tax increases are needed. The spending compromise of August 2011 will cover approximately $1 trillion, leaving a balance of $3 trillion.
Under that compromise, there will be reductions in spending over the next decade. Half of the reductions will be from the Department of Defense and half will be from reduced payments to Medicare providers.
While there is a need for additional spending cuts, Geithner suggests that tax increases will also be necessary. The tax increases in his view should be “roughly $1.5 trillion over 10 years.” If these increases are not made, there would be additional cuts in defense and entitlement programs.
Geithner noted, “We can’t offer Americans the illusions of tax cuts that pay for themselves. No responsible politician can offer the nation fiscal sustainability through trillions in unpaid-for tax cuts.”
He suggested that there will be negotiations following the election in November. Under current law there will be an expiration of the existing tax cuts and major “across-the-board cuts in spending.” Therefore, Washington has a “strong incentive to agree on a balanced package of reforms.”
Editor’s Note: Secretary Geithner is setting forth the White House plans for the November negotiation. The White House budget proposes substantial increases in taxes for upper-income taxpayers. This could include increased income tax rates, increased rates on long-term capital gains and reduced itemized deductions.
Source: Children’s Home Society of Florida
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Speaker Boehner Promotes “Real Tax Reform”
On May 15th, Speaker Boehner gave an address on the economy, debt limit and American jobs. He pledged that the House would vote before the election on a bill to stop the potential January 1, 2013 tax increases.
If Congress does not change the law, the tax reductions passed in 2001 and 2003 will lapse and there will be a substantial tax increase. Boehner stated, “On that day, without action by Congress, a sudden and massive tax increase will be imposed on every American – by an average of $3,000 per household. Rates go up, the child tax credit is cut in half, the AMT patches end, the estate tax returns to 2001 levels and so on.”
Members of both political parties have been calling this a “fiscal cliff” and discussing potential results if there is no change in the law. The combination of large tax increases and the scheduled $1.2 trillion in budget cuts would have major impact on the nation.
Boehner also stated that there will be an “expedited process by which Congress would enact real tax reform in 2013.” He did not state exactly how that would work, but it may include specific time limits for the House Ways and Means Committee and Senate Finance Committee to send bills to the floor for votes. The goal of an expedited process would be to force Congress to face up to budget and tax reform issues in 2013.
House Ways and Means Committee Ranking Minority Member Sander Levin (D-MI) expressed concern about the potential impact of tax reform in 2013. He noted that a current proposal is to reduce the top rate from 35% to 25%. This would require large changes in the rules for itemized deductions. Levin noted that this reduction in rate would almost certainly reduce “the mortgage interest deduction and the exclusion for employer-provided healthcare. Yet the benefits of those provisions flow overwhelmingly to middle and lower-income families.”
Editor’s Note: Congress does have other rules that expedite action. For example, military base closing plans are created by a specific committee and then submitted to a single vote in Congress. It is possible that an expedited process would create a deadline and require a similar structure. House Ways and Means Chair Dave Camp (R-MI) has stated that any reform of taxes will include significant changes to individual taxes, corporate taxes and estate and gift taxes. If the top income tax rates are reduced, there will be dramatic changes in the itemized deduction rules. Charitable organizations will need to express strong support for retaining the deductions and incentives for charitable giving.
Source: Children’s Home Society of Florida
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