Accounting Today - April 2012

A future for corporate tax reform?
taxnews
Probably not this year, but experts say 2013 looks good

BY roger russell

As of April 1, the U.S. tax rate became the highest in the world as a result of Japan lowering its rate by five percentage points. At least partially as a result of its former status as “highest tax rate in the world,” Japan lost 39 Fortune Global 500 company headquarters in the last decade. The U.S. did worse, losing 46 Fortune Global 500 company HQs in the same span of time.

“Leading the world with the highest corporate tax rate and an overly complicated tax code is not a distinction we wish to have,” said Elaine Kamarck, a lecturer in public policy at the Harvard Kennedy School of Government, a former advisor to President Bill Clinton and Vice President Al Gore, and the Democratic co-chair of the Reforming America’s Taxes Equitably Coalition. “Reforming the corporate tax code has wide bipartisan support and the momentum is there to get the job done and help create jobs in this country.”

However, Kamarck said that it is unlikely that the corporate rate can be lowered separate from a wider tax reform. “While it doesn’t bring in as much revenue as before, it still brings in a fair chunk, 7 to 13 percent of total revenue,” she noted. “But it’s still a big chunk, and we’re in an era where people are worried about deficits, so it’s hard to imagine a cut that’s not almost revenue neutral.”

While she agrees that 2013 is more likely for any kind of legislation, she believes that it might be possible to pass something this year. “There is a growing consensus in Washington that we will have tax reform on the agenda in 2013,” she said. “But we actually think that there is a possibility we could do the corporate tax reform in 2012.”

There are two reasons for this, she said: “First, the two parties are actually very close on the outlines of the bill. The White House

superficial similarity between the Democratic and republican proposals to revamp corporate tax has some predicting a deal to reform the code next year, if not this year. Added to that are the voices on both sides of the aisle calling for lower rates to make u.s. corporations more competitive with their overseas counterparts.

for the overall economy. This view is shared by both sides of the aisle, which is why we feel this is a pretty logical first step into what we see as a larger step into overall tax reform.”

put out a proposal for a 28 percent rate, paid for by closing various loopholes, and the Republicans put out their proposal for a 25 percent rate, paid for by closing various loopholes. You can see the outlines of a deal. The second reason is that Congress passed with nary a whisper the extension of the payroll deduction and unemployment compensation. We think that politicians are feeling the anger of the people in not getting something done, and this is something that’s viewed as a deliverable to voters who are unhappy with the gridlock in Washington.”

HOPEFUL ON REFORM

There’s a good opportunity to pass real reform, agreed Mark Sieke, of counsel at the Los Angeles office of Mitchell Silberberg & Knupp. “If you put aside the notion of an election year issue but look at it as reform, there’s a better-than-even chance that something will get enacted. There’s a question as to whether, on net, tax revenue would go up or down under the administration proposal,” he said, since the disappearance of deductions and credits would counteract any effect of the lower rate.

“In addition to revenue-neutrality, there’s a push for entity-neutrality,” he observed. Although the administration framework doesn’t describe it in detail, it advances the notion of “parity” between the taxation of corporations and non-corporate entities. “Sometimes the fact that a partnership is not a taxable entity gets lumped in with C corporations that don’t happen to pay much in the way of corporate tax,” he observed. “But there are reasons for passthroughs. To the extent there is federal legislation to tax a passthrough at the entity level, it would be a strong break with tradition and the nature of conducting business through a partnership form.”

Rep. Dave Camp, chairman of the Ways and Means Committee, has likewise called for neutrality between business and individual tax rates, noting that the difference between individual and corporate tax rates has an important effect on a business and how it is organized. “For example, if individual income tax rates are substantially higher than corporate income tax rates, there is a clear incentive for taxpayers to organize business activity in corporate form,” he said.

“There is little doubt that economic distortions can be created by a tax code that tilts too much in any one direction,” he said. “ Naturally, one of the most effective ways to prevent that distortion is to create a neutral tax code

See REFORM on 15

IRS RESTRICTS RETURN DROP-OFFS AT TACS WASHINGTON D.C. — The Internal Revenue Service is taking steps to discourage tax preparers and other taxpayer representatives from dropping off completed tax returns at its local Taxpayer Assistance Centers, instead of mailing or electronically filing them. The IRS said that starting this year, IRS TACs generally will not accept bulk returns for processing and mailing, particularly when it affects taxpayer services. Local TAC managers will have the authority to make exceptions to this policy, the IRS added, and will accept drop-off returns if, in their opinion, tax preparation and other customer account services are not affected.

‘We think
politicians
are feeling
the anger
of the
people.’

$1B IN UNCOLLECTED REFUNDS WASHINGTON, D.C. — Tax refunds amounting to over $1 billion are awaiting an estimated 1 million people who still have not filed a federal income tax return for 2008. To collect, taxpayers and preparers must file a return with the Internal Revenue Service no later than Tuesday, April 17. The IRS estimated that half of the potential tax refunds are for more than $600. It also noted that taxpayers seeking a previously unclaimed 2008 refund may still have their refunds held if they have not filed returns for 2009 and 2010. In addition, the refund will be applied to any amounts still owed, or may be used to offset unpaid child support or past-due federal debts such as student loans.

Although critics have pointed out that many corporations would pay more in tax under the president’s reform proposal because of the elimination of various tax breaks, Kamarck indicated that a more simplified tax system is still more attractive. “The argument goes beyond the bottom line of the tax rate, it goes to a sense that simplicity and predictability are good for business,” she said. “ Complex tax codes of industry-specific provisions are bad not only for individual business but

GE PAID 2.3% TAX RATE STAMFORD, CONN. — An analysis by the group Citizens for Tax Justice found that General Electric paid an effective average tax rate of only 2. 3 percent over the past 10 years, according to the company’s annual 10-K report. The group found that the company’s pre-tax U.S. profits of nearly $81.2 billion over the 10-year period were often not taxed at all at the federal level. For 2011, GE did pay an 11. 3 percent effective tax rate on over $9.1 billion in pre-tax U.S. profits, but in 2010 it paid no federal income taxes and actually received over $3 billion in net tax benefits from the federal government on over $4.7 billion in profit.