Execs: Broken Tax System Hurts Business

Senate Finance Committee asks: How low does the tax rate have to go to stop corporate favors.
Helen ShawSeptember 20, 2006

Executives and government officials got a chance to sound off about the federal tax system, and tax reform during a Senate Finance Committee hearing on Wednesday. While witnesses testified that the tax system is complex, inefficient, and costly, they also proposed principles for tax reform and practical ways to accomplish broad tax reform.

“The U.S. tax system is astoundingly inefficient because of mind-numbing complexities,” commented Charles Rossetti, senior advisor at The Carlyle Group and a former Internal Revenue Service commissioner. For instance, since the 1986 tax reform, Congress has made on average 2.9 changes to the tax rules for every working day for the past 19 years, said Rossetti. He suggested that the committee clamp down on Congress’ political process and make it more difficult for Congress to legislate changes to the tax system.

All witnesses agreed that a lower corporate tax rate and a broader tax base would be a positive change. One committee member asked the witnesses if Congress would be “on the right track” if it legislated the way it did in 1986 when it pushed through tax reform and focused on lowering rates and eliminating preferences in the tax system; all of them said “yes”.

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Another committee member asked brazenly how low the tax rate would need to drop to prevent companies from visiting Washington, D.C. and demanding preferential tax treatment. Currently, the statutory corporate tax rate in the U.S. is 39 percent, compared with the average 36 percent among G-7 countries, according to Robert Carroll, deputy assistant secretary for tax analysis at the U.S. Treasury.

David Bernard, vice president of tax and real estate at Kimberly-Clark Corporation—a company that can testify to the tax code’s complexity by referring to the 3,300-page 2005 tax return it filed last week—said a 10 percent rate reduction “would be perfect.” Thomas Neubig, national director, quantitative economics and statistics at Ernst & Young, said a survey of companies reveals that a corporate tax rate of 25 percent or below is favored over other tax reforms.

Senator Charles Grassley (R – Iowa), chair of the committee, noted that broadening the tax base is “tricky.” “What tax benefits would businesses be willing to give up in order to get a lower rate?” he asked the witnesses. Jeff Johannesen, managing director of RSM McGladrey, shot back: “What kind of return is the government getting on its incentives?” Most of the other witnesses did not respond with specific details, but suggested an analysis of tax benefits and compliance burdens, beginning with a clean slate and not the complex mix of laws that make up the tax code.

Many witnesses cited the European Union’s experience of lowering corporate tax rates and receiving rising corporate tax revenue as a competitive threat to the U.S. Additionally, some pointed to other ways that the U.S. could improve its competitiveness on the global playing field.

David Walker, comptroller general at the Government Accountability Office, talked about healthcare and education for example. He told the committee, “Companies don’t have duties to countries, but to shareholders.” Walker noted that healthcare costs are the top challenge for U.S. companies. Education and the preparation of future workers is another main challenge, said Walker, who noted that the U.S. is not even in the top 20 countries for math and science at the junior high and high school levels. If challenges such as those were met, there would be fewer barriers to conducting business in the U.S., he believes.

Treasury’s Carroll noted that the Advisory Panel on Federal Tax Reform listed three goals: simplicity, growth, and fairness. All witnesses agreed that the tax system should be simpler and more predictable. “This is important—to recognize that people ultimately pay corporate income taxes in their role as shareholders, workers, and consumers,” said Carroll.