The President's Corporate Tax Reform Plan: Rhetoric and Reality

February 22, 2012

The administration released today its corporate tax reform "framework", which is largely a rehash of previous proposals, but with a lowering of the corporate rate from 35 percent to 28 percent.  As with previous proposals, there is a complete disconnect between the rhetoric and reality, particularly in regards to simplification of the tax code and elimination of special interest loopholes, aka tax expenditures.  First, the rhetoric (which is quite agreeable):

The United States now essentially trades off greater tax expenditures, loopholes, and tax planning for a higher statutory corporate tax rate relative to other countries. This is a poor trade that produces a tax system that is uncompetitive relative to other countries, distorts business decision making, and slows economic growth.

In recent years, our major trading partners have overhauled their tax codes, lowered their statutory corporate tax rates, and in some cases broadened their tax bases. The United States has not enacted similar reforms, leaving the United States with the second highest statutory tax rate among advanced countries. In April 2012, after the scheduled reductions in Japanese tax rates go into effect, the United States will have the highest statutory corporate income tax rate in the Organization for Economic Cooperation and Development (OECD).

...

The tax preferences created by tax expenditures and loopholes add complexity to the tax system and contribute to a substantial business tax compliance burden. Additional rules and regulations are needed to limit incentives to their intended beneficiaries. Taxpayers have to spend time and money learning about tax incentives and often rely on third parties to help them navigate the thicket of complex tax rules. The Internal Revenue Service (IRS) has to spend resources monitoring and enforcing the rules. Disputes invariably arise between the IRS and taxpayers, and society expends resources adjudicating these disputes. In fact, it is estimated that the administrative and compliance costs in the corporate income tax system now exceed $40 billion per year, or more than 12 percent of revenue collected.

...

The President's plan would start from a presumption that we should eliminate all tax expenditures for specific industries, with the few exceptions that are critical to broader growth or fairness.

Now the reality, which goes in the opposite direction.  The following table lists all the tax provisions that are sufficiently specified in this proposal.  The administration proposes to close a mere 6 loopholes, out of about 250 (according to the Joint Committee on Taxation).  Worse, the administration proposes to add 11, for a net gain of 5 loopholes.

Mind you, this is all in the same document, presumably written or edited by the same person or group of people.  This is a framework for cognitive dissonance, not tax reform.

Does the President's Plan Simplify the Tax Code?

Tax Provision

Change in Number of Tax Expenditures

Explanation

Eliminate "last in first out" accounting.

-1

 

Repeal expensing of intangible drilling cost.

-1

 

Repeal percentage depletion for oil and natural gas wells.

-1

 

Disallow interest deductions allocable to life insurance policies unless the contract is on an officer, director, or employee who is at least a 20 percent owner of the business.

1

Carves out another loophole within a loophole.

Tax carried (profits) interests as ordinary income.

-1

 

Eliminate the special depreciation rules that allow owners of non-commercial aircraft to depreciate their aircraft more quickly (over five years) than commercial aircraft (seven years).

-1

 

Repeal accelerated depreciation.

-1

 

Reduce the deductibility of interest.

0

Not generally considered a tax expenditure.

Focus the manufacturing deduction more on manufacturing activity, expand the deduction to 10.7 percent, and increase it even more for advanced manufacturing.

1

Expands and extends an existing tax expenditure.

 Expand, simplify and make permanent the  R&E Tax Credit.

1

Expands an existing tax expenditure that would otherwise expire.

Make permanent and refundable the tax credit for the production of renewable electricity.

1

Otherwise would expire.

Require companies to pay a minimum tax on overseas profits.  Thus, foreign income deferred in a lowtax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country.

1

Carves out a loophole within deferral for income earned in lowtax jurisdictions.

Remove tax deductions for moving operations abroad.

0

Not generally considered a tax expenditure.

Add a 20 percent income tax credit for the expenses of moving operations back into the United States.

1

 

Tax currently the excess profits associated with shifting intangibles to low tax jurisdictions.

1

Definition of "excess profits" and "low tax jurisdictions" will require special treatment of certain businesses and industries.

Require that the deduction for the interest expense attributable to overseas investment be delayed until the related income is taxed in the United States.

0

Not generally considered a tax expenditure.

Allow small businesses to expense up to $1 million in investments.

1

 

Allow cash accounting on businesses with up to $10 million in gross receipts.

1

Expands an existing tax expenditure.

Double the deduction for start-up costs.

1

Expands an existing tax expenditure.

Reform and expand the health insurance tax credit for small businesses.

1

 

Total Effect on Number of Tax Expenditures

5

 

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