Lifting the Handicap

By lowering the corporate tax rate, can the United States regain a competitive edge?

That trend caught the attention and ire of Treasury Secretary Henry M. Paulson Jr., whose summer powwow — The Treasury Conference on Business Taxation and Global Competitiveness — drew everyone from former Federal Reserve chairman Alan Greenspan to FedEx chairman Frederick Smith. And the ensuing dialogue hinted that at least some business leaders might trade in special-interest deductions for a lower rate and simplification. “I would trade it in a minute for a simpler, lower rate,” said Oracle president and CFO Safra Catz of the R&D tax credit.

Which deductions meet which fate is another matter entirely. But there is agreement that preserving the current system is both exhausting and expensive. Says Hank Gutman, a principal in KPMG’s Washington National Tax practice, “There are more than 30 provisions, including the R&D tax credit, that affect corporations and that are not permanent in the tax code.” Just patching the alternative minimum tax (AMT), says Marc J. Gerson, a partner with Miller and Chevalier, requires “a $50 billion fix to keep current law.”

At least the Rangel bill, says Gutman, offers “a baseline for discussion.” It also offers a sneak preview of where the battle lines will be drawn. “Different corporate sectors affect different parts of the economy in different ways,” he explains. This is legislation that will be felt on “a company-by-company basis. And I don’t know that you can get everyone on the same page.”

Keeping What’s Mine

Certain provisions could pit U.S. multinationals against purely domestic firms. Rangel’s bill, for example, makes expenses related to foreign-source income nondeductible until earnings are repatriated and taxed in the United States. This essentially will “gut deferral,” says FEI’s Prysock, and create a serious disadvantage to U.S.-based multinationals, such as General Electric and Merck, which have amassed large foreign profits.

Companies operating just in the United States, on the other hand, will have to evaluate whether a lower rate makes up for losing the deduction for domestic production activities. Oil and gas companies will have to make similar assessments about the elimination of LIFO, as will large wholesalers. And S-corporations will lose their manufacturing tax break without being entitled to the lower corporate tax rate. “There are a lot of oxen being gored here,” says Eli J. Dicker, chief tax counsel for the Tax Executives Institute (TEI), which is currently “challenging its members” to model the business impact of the different provisions.

Splitting the Difference

In fact, the numerous offsets have led Republicans to dub the Rangel bill “the mother of all tax hikes.” But one silver lining, says Prysock, is that the bill does manage to “bifurcate individual reform and corporate reform.” The fear was that “individual reform would be paid for by corporate tax reform,” he says, adding that FEI’s Committee on Taxation plans to analyze and respond to the Rangel bill in the coming months.

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