The Department of Treasury and the White House have released a “framework“ of proposals to reform the corporate tax system. There is no real question the system needs an overhaul. Economists, businesses, and politicians all agree. To even have the Administration move forward on this important issue is progress. However, even though the details are not complete, this framework is a major disappointment. It is hard to believe it took them three years to come up with this incomplete effort of platitudes and retreads. .
There are a few good suggestions. The centerpiece is a cut in the top corporate rate - now at 35 percent to 28 percent. The proposal suggests broadening the income base, also a good suggestion and, with deficits more than $1 trillion a year, announced their plan will not "add a dime to the deficit." However, that is about as far as it goes.
The proposal provides special tax treatment for manufacturing - cutting that tax rate to 25 percent - and a minimum tax on profits earned in abroad. More on these later.
This is where we get to the disappointment, and showing the framework is not only a political document but also a reflection of the philosophy of picking winners and losers. It is so inconsistent by saying one thing and proposing another.
The plan calls for the elimination of dozens of business tax loopholes (whatever they are) and tax expenditures starting with “a presumption (to)… eliminate(s) all tax expenditures for specific industries, with the few exceptions that are critical to broader growth or fairness.”
Here are all the cited examples of specific reductions in tax expenditures and loophole closers as seen many times before:
- Eliminate “last in first out” accounting-This has been a dream of liberals for years. I take no view on it.
- Eliminate oil and gas tax preferences-An old standby and whipping post for the Administration. Makes the numbers look better and very little chance to pass.
- Reform treatment of insurance industry and products- Basically this is to halt the use of life insurance on a corporation’s officers, directors, or employees to create “inside build up” on policy earnings that can tax-deferred. Same treatment individuals get on annuities and life insurance now. This is a very minor issue and hardly a highlight for corporate tax reform. (The framework would also make other changes in the tax treatment of insurance (Subchapter L) but I am not qualified to judge them, as this is a very specialized field.)
- Taxing carried (profits) interests as ordinary income for financial managers-This is been around the block more than once being saved the last time by the Democrat-controlled Congress. It has no real place in corporate tax reform, as it is a partnership issue and effects individuals.
- Eliminate special depreciation rules for corporate purchases of aircraft-This one will also not go away. The Obama Administration and the Democrat Congress approved the current treatment in 2009. They now want to dump it in the bone yard. Corporate jets are almost an obsession for Mr. Obama. This is such a minor provision in the law; it should be embarrassing to have it featured in this important issue. Why waste the space?
So there you have it--- the great list of tax base expansion and reforms! I did not make these up.
While details are incomplete, the framework also focuses on manufacturing, however that is defined, by giving them a preferential tax rate, pours more subsidies for research and development and the production of clean energy. This would seem to be in direct conflict with the principals stated in the framework: “the tax expenditures and loopholes in the U.S. tax system, together with the structure of the corporate tax system, produce significant distortions that can result in a less efficient allocation of capital, reducing the productive capacity of the economy and U.S. living standards.” It looks to me that picking winners and losers is exactly what should not be done and what the Administration is proposing. One man’s distortion is another’s unfairness.
The conclusion is that it is fine to give a preference to a manufacturing facility in Ohio-a political swing State in November- but not to the oil and gas industry, a vibrant, essential and robust part of the economy. Is there some inconsistency here? What about non-manufacturing businesses? Are they not worthy?
Finally the framework goes after multinational corporations. The taxation of these behemoths deserves review. The current U.S. tax system subjects foreign subsidiaries of U.S.-based multinationals to taxes on their overseas income offset by foreign tax credits. However, corporations are not required to pay taxes in the United States on that income until they repatriate it back to the U.S., a principal called a deferral (since it defers taxation of the income). Under the President’s proposal, income earned abroad must be subject to a minimum rate of tax.
Many policy makers including House Ways and Means Chairman Dave Camp and many in the business community favor revamping the system from a worldwide tax system to a territorial one. The Administration opposes any shift to a territorial based system and this issue will be strongly debated and contested.
There are other items of concern such as a proposal to deny deductibility of interest that should be examined. While the framework is disappointing, shows a lack of effort on some issues, a favored industry bent on others but at least it is an effort to kick start the process. One thing is for certain; it will not be resolved any time soon.