Lifting the Handicap

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

For their part, finance chiefs and tax directors are only beginning to discuss details of a tax overhaul. But most are in agreement that the current system is untenable. “Tax complexity adds compliance costs that are not readily evident in the tax rates,” says George Herrmann, executive vice president for Right Management. Moreover, says Richard Skeen, tax director at HealthTronics, “anything that saves me time and expense is worth evaluating.”

Still, if there is to be substantial overhaul of the tax code, don’t look for it in 2008. Much of what will happen then will depend on what was resolved by the end of 2007 — issues still pending as CFO went to press. Whether the AMT gets extended for another year and how it is paid for (raising taxes on hedge funds and private-equity partnerships was one possible solution) captured most of Congress’s attention in December and promised to carry over to the new year if not resolved.

The Presidential election also promises that no major change will gain traction until a new Administration is in place. But most tax observers expect hearings and discussions to be held in 2008, setting the stage for real reform in 2009 or 2010. “History tells us that business taxation is not the first order of voter [concern],” says Gutman. But whoever is elected, he adds, will have to embrace some type of reform.

At this point, the Rangel bill is the one alternative on the table. Secretary Paulson is expected to unveil the Administration’s take on tax reform sometime this year; one component is expected to be a lower corporate tax rate. Still, no one is holding his breath for some miraculous solution — just one that is acceptable to all involved. Pointing to numerous tax proposals dating back to the 1960s, Gutman says, “The wheel does not have to be reinvented here.”

Whether a lower rate ultimately guarantees a global edge, however, “is a multilayered question,” says TEI’s Dicker. “What you want to do, at least, is create a level playing field.”

Lori Calabro is a deputy editor of CFO.

Wrangling Over Rangel

Whether the bill sponsored by Rep. Charles Rangel (D–N.Y.) has a chance of passing in its current form remains unclear. But the proposal has framed the debate over lowering the corporate tax rate. Here are some of the key corporate provisions contained in Rangel’s Tax Reduction and Reform Act of 2007 that executives — and their lobbyists — will likely debate in the months ahead:

Reduction of the corporate tax rate. The bill cuts the top corporate marginal tax rate from 35 percent to 30.5 percent. (Estimated cost over 10 years: $364 billion.)

Repeal of the deduction for domestic production activities. The tax break, says Rangel, benefits only a few corporations, providing a 3.15 percent rate cut on domestic manufacturing income. (Estimated to raise over 10 years: $115 billion.)

Allocations of expenses and taxes for repatriated income. The provision would require U.S.-based companies that defer income through controlled foreign corporations to also defer the associated deductions. Currently, corporations are allowed to take deferred deductions and account for them on a current basis. (Estimated to raise over 10 years: $106 billion.)

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