What Kind of Tax Reform Do We Need?
This is an introduction to a package of five articles offering opinions on what kind of tax reform would be best. Scroll down below the introduction to see the articles. There’s one thing about corporate tax reform that everyone agrees on: that we should have it. But what should it look like? On that point, opinions are scattered. It was not difficult for CFO to find strong opinions on this topic. We’ve gathered the perspectives of a CFO, a principal of a Big Four firm, a university pr ..
Philip G. Cohen
This is one of five articles offering opinions on what kind of tax reform would be best. See the others, below left.
Politicians complain about the Internal Revenue Code. They grumble about how the tax rules are far too complex and that the statutory rates, at least on the corporate side, are far too high, dwarfing those of our trading partners.
What they grumble far less about is that our tax laws are, in their present condition, teeming with provisions benefiting various special interests — not by accident, but by design.
Many in Congress crave seats on their respective chambers’ tax-writing committees. Is it because of an academic interest in tax policy? Because of the desire to enact tax laws in the best interest of the American people? Unfortunately, I think the answers are no and no, in many instances. Legislators yearn for these assignments because it opens the campaign-contribution spigots. Donors generally fund politicians because they want some quid pro quo. This often takes the form of a tax provision advancing the interests of the supporter.
These government handouts cost the U.S. Treasury money. As a result, there are both rising budget deficits and high tax rates. Those who lack the special connections accorded to privileged donors shoulder the cost of Congressional giveaways.
There is little appetite in the current Congress to pass legislation that would threaten important campaign contributors. This is why, for example, no recent legislation has been enacted to curtail the growing threat of inversions to the corporate tax base. Instead, there is impetus for a tax holiday for the current low-taxed offshore earnings of U.S. multinationals that would match or come close to the 5.25% rate previously provided by now-defunct Internal Revenue Code Section 965. This, coupled with a migration to territorial taxation for future overseas earnings with few constraints, would undoubtedly please those U.S. multinationals profiting from such legislation.
The tax reform that we need would broaden the base and lower the statutory rates. It would serve to encourage job growth in the United States and reduce some of tax law’s complexity. It would stop the attrition to the current corporate tax base, including impeding income from shifting abroad. This would include, among other things, taxing all business income the same way, whether earned by a corporation, partnership, sole proprietorship, etc., albeit at a relatively low rate, perhaps 25% to 28%. Under this scenario, S corporation status would be eliminated. There would be substantial shareholder credit accorded on dividends paid by C corporations to reduce double taxation. A comparable credit would apply to non-corporate business income.
On the international side, earnings of foreign subsidiaries that pay foreign income tax below a certain level, e.g., 80% to 90% of the U.S. tax rate, would be subject to immediate U.S. taxation, with the ability to claim foreign tax credit relief. Foreign companies managed and controlled in the United States would generally be taxed as if they were incorporated in the United States.
Unfortunately, this type of corporate tax reform probably lacks sufficient Congressional proponents because it would be unpopular with many key contributors. The system must change to enact tax reform that the country needs.
Who is to blame for the fact that the tax reform we need is unlikely to occur? As Shakespeare’s Cassius proclaimed, “The fault, dear Brutus, is not in the stars, But in ourselves….”
Philip G. Cohen is an associate professor of taxation at Pace University Lubin School of Business and a retired vice president of tax and general tax counsel at Unilever United States. The views expressed herein do not represent those of any entity with which the author is or was associated.