Although
this page presents a highly simplified account
of US taxation of corporations, in reality
the Tax Code is an enormous mountain of nightmarish
complexity. Politicians and businessmen alike
want to fix it, and during 2005 President
Bush convened a Tax Panel which took evidence
and made proposals for root and branch change
of the Code.
In
September, the panel turned its attention
to taxation issues facing America’s corporate
and small business taxpayers during a meeting
in Tampa, Florida.
In
testimony from several academics and tax law
experts, the panel heard how the current state
of the US tax code has placed an unfair and
disproportionate compliance burden on small
firms, while growing global competition and
sophisticated tax planning has allowed the
corporate tax base to be eroded.
“Small
businesses and self-employed taxpayers, in
particular, are burdened by the complexity
of our tax code and bear a substantial proportion
of the estimated $125 billion in compliance
costs,” observed tax panel chairman Connie
Mack.
“These
costs create a disproportionate burden, as
studies have found that the smaller the business,
the higher the cost of complying with the
tax code per dollar of tax paid. We have heard
from small business owners from all over America
who have told us that the tax code should
be reformed and simplified so that these entrepreneurs
can spend less time doing paperwork and more
time growing their businesses,” he added.
Meanwhile,
Douglas Shackleford, professor at the University
of North Carolina's Kenan-Flagler Business
School noted that the US corporate tax base
is “under attack from many directions”.
"Despite
a decade of record profits, the corporate
income tax never recovered to the levels of
the less prosperous 1970s,” Shackleford stated
in his testimony.
However,
he observed that the decline of the corporate
tax sector has been a global phenomenon, caused
by growing international competition which
has affected “all countries' ability to extract
corporate tax dollars".
Other
factors which have contributed to falling
corporate tax revenues according to Shackleford
include: the rise of the knowledge economy
with its associated intangible assets; growth
of ‘S Corporations’ and partnerships that
“pass through” taxes; deductions from employee
stock options; and the formulation of tax
shelters.
Shackleford
told the panel that the success or failure
of future tax reforms can be measured by a
corresponding decline or growth in the country’s
tax planning industry.
"The
key to reducing the need for tax accountants
and lawyers is the elimination of differences
in tax rates. Whenever you tax the same income
differently, you provide an opportunity for
a planner to reduce taxes," he observed.
In
November the Panel
recommended two options for simplification
of the US tax code in its final report.
The
two plans differed on the taxation of businesses
and capital income. Although they use different
approaches, the nine member panel of academic,
legal and tax experts chaired by former Republican
Senator for Florida Connie Mack said that
the plans share a common goal of providing
simple and straightforward ways for Americans
to save free of tax while lowering the tax
burden on productivity-enhancing investment
by businesses.
The
first plan, known as the Simplified Income
Tax Plan proposed to:
- Reduce
the number of income tax brackets to four
at 15%, 25%, 30%, 33%.
- Exclude
100% of dividends of U.S. companies paid
out of domestic earnings.
- Exclude
75% of corporate capital gains from US
companies (the tax rate would vary from
3.75% to 8.25%)
- Tax
interest at regular income tax rates.
- Tax
small businesses at individual rates (top
rate lowered to 33%).
- Tax
large businesses at 31.5% under a territorial
system with simplified accelerated depreciation.
The
second plan, known as the Growth and Investment
Tax Plan, proposed:
- Three
tax brackets: 15%, 25%, 30%.
- Dividends,
capital gains and interest income all
taxed at 15%.
- Sole
proprietorships taxed at individual rates
(top rate lowered to 30%).
- Other
small businesses taxed at 30%.
- Large
businesses taxed at 30% on a destination
basis with expensing for all new investment.
- Interest
paid and received will be non-deductible
except for financial institutions.
Under
both plans, a number of further measures would
be applied to individual taxation. Both proposals
would allow every taxpayer to use a simple
tax form, less than half the length of the
current Form 1040.
The
Panel also developed and considered a progressive
consumption tax plan that would be administered
using the infrastructure of the current tax
system, but was unable to reach a consensus
to include it as a recommendation. In addition,
The Panel also discarded ideas for a value-added
tax and a national retail sales tax.
Then
Treasury Secretary John Snow was set to deliberate
over the panel's proposals before making recommendations
to President Bush as to which parts of the
report, if any, to adopt.
"The
recommendations that they (the tax panel)
are presenting today will begin the dialogue
that will help shape the future of tax policy,"
Snow said. "Their
advice is the starting point, and I look forward
to reading their recommendations and considering
them carefully before I make a recommendation
to the President based on the excellent work
carried out by this Panel," he added.
In
December, 2005, however, it transpired that
the Bush administration was considering delaying
the unveiling of a broad tax reform proposal
until 2007 while the Treasury continues to
deliberate on the recommendations of the tax
reform panel, in order to avoid having to
sell a controversial policy initiative during
a mid-term election year.
The
tax reform effort was also hampered by the
fact that the assistant secretary for tax
policy post has been vacant for several months,
and one Republican source noted that there
was insufficient manpower to churn out such
an extensive and wide-ranging policy initiative.
John Snow said that government would not be
held to an "artificial timetable" with regard
to tax reform. "We
will be looking hard at the whole question
of tax reform," Snow told reporters in Washington
D.C. "I
don't want to foreshadow what we will be recommending
to the president," added the Treasury Secretary.
In
the spring of 2006, Snow said that his department
remained "busy" working on proposals for simplification
of the US tax code, despite the fact that
the Bush administration appeared to have quietly
shelved its tax reform commitments until 2007.
"At
the Treasury Department we are quite busy
working on tax reform, carefully considering
the options provided by the Tax Panel," Mr
Snow stated in response to a question posed
in an online interactive forum known as "Ask
the White House."
However,
Mr Snow once again reiterated that the Bush
administration was in no immediate hurry to
forge ahead with tax reform. "Reform of the
code is so important and the opportunity to
really improve it only comes around every
twenty years or so, so we want to be sure
that we get it right. So at this time we must
consider all options carefully and be sure
that we are creating a more simple and fair
tax system for all," he explained.
With
mid-term elections approaching, it is now
widely believed that moves towards serious
tax reform will not begin in earnest for about
a year. Indeed, Senate Finance Committee chairman
Charles Grassley (R - Iowa) told Tax Council
members earlier this month that the Treasury
will not publish its long-awaited report on
tax reform until the following year at least.
"From
what I’ve heard, this won’t happen this year,"
stated Grassley.
In
February 2008, senior House tax writer, Charles
Rangel suggested that President Bush had missed
his last opportunity to bring about meaningful
and lasting reform to the US tax code with
a budget that proposed "more of the same"
tax cuts for the wealthy and spending cuts
for essential entitlement programs.
"President
Bush’s budget proposal is what we expected,
but not what we need," the House Ways
and Means Committee Chairman commented in
response to Bush's 2009 Budget proposals.
He
continued: "Rather than embrace his last
months in office as an opportunity for bipartisan
achievements on critical areas such as tax
reform, health care and economic security,
President Bush’s budget offers more
of the same – expensive tax cuts for
the wealthy, devastating cuts to Medicare,
erosion of employer-based health care, retirement
benefits, Social Security privatization and
cuts to other social services."
While
Bush could have been remembered for bringing
about much supported simplification of the
US tax code, something he pledged early in
his presidency, Rangel believed that the administration’s
legacy "will be written in red ink".
"In
fact, this budget offers little or no mention
of the pressing need to simplify our tax laws.
Despite the attention the President gave this
issue in the beginning of his term, we have
not seen any concrete proposals or leadership
on tax reform during Bush’s seven years
in office. I would argue that it is not too
late to do the right thing and reach out to
Congress to begin serious discussions and
restore equity and fairness to our tax code,"
Rangel stated.
"I
have introduced a reform proposal that would
cut taxes for more than 90 million lower-
and middle-class families while also reducing
the corporate tax rate to help keep our companies
competitive internationally. I plan to continue
this overdue discussion with hearings in the
near future and I strongly urge this Administration
to use its remaining time in office to be
a partner, not a roadblock, toward establishing
bipartisan consensus on tax reform,"
he added.
Tax
reform issues also came to the fore in April
2008, when Senate Finance Committee Chairman
Max Baucus (D-Mont.) kicked off a series of
hearings on tax reform with a look at America’s
income tax code, and announced plans for future
hearings and roundtable sessions to prepare
for a comprehensive overhaul of the tax code
in 2009.
The
Finance Committee has jurisdiction over US
tax policy, and Baucus argued that this year’s
look at America's tax system and reform options
should produce a set of principles to guide
the work of the Committee – and a new
presidential administration – on tax
reform next year.
“The
Finance Committee needs to be informed and
ready to go in January 2009, and that means
we have to work hard now. We have to first
understand pretty comprehensively how the
system works today. We have to talk about
the natural tensions in tax reform, and what
actually happens to working families, to American
businesses, and to our country’s global
competitiveness depending on how we change
the code,” stated Baucus, continuing:
“Even
in a year where much won’t get done
legislatively, we can build a framework of
knowledge on which to review options and proposals
when it’s time for tax reform.”