Taxed to the Max

Hefty tax rates continue to penalize U.S. companies, and the calls for reform are growing louder.

Glimmers of Hope

Determining an optimal U.S. tax rate challenges international economists. Jack Mintz, Palmer Chair in Public Policy at the University of Calgary (Canada), estimates that if the United States could trim its effective tax rate to 25 percent, it would more than double investment in the United States by non-U.S. companies (that is, inward direct investment) to 2.3 percent from 1.3 percent of GDP.

Rep. Charles Rangel (D–N.Y.), the influential chairman of the House Ways and Means Committee, has proposed a rate almost as low as Mintz advises. In 2007, Rangel introduced a 30.5 percent top corporate tax rate that did not become law. Recently he pledged to reintroduce the bill with a top rate of 28 percent. A spokesman says Rangel would entertain a lower threshold if Republicans work with Democrats to close tax loopholes.

That raises the tantalizing possibility that U.S. rates would move down sharply enough to align with those of other OECD nations. And there are hints that, despite current stagnation, the issue may ultimately win serious attention in Washington. Newly installed Treasury Secretary Timothy Geithner has confirmed that the Obama Administration intends to haul the entire corporate tax system into the 21st century. And the stimulus package that Congress passed in mid-February features a few tax cuts for business, some aimed at sustainability, although none is sweeping or likely to become permanent.

That should not dissuade advocates of major change, some say. In matters of tax reform, scope helps, says Weinberger, the former assistant secretary of the Treasury for tax policy under President George W. Bush. “It’s easier to do something big than something small.” Smaller bills come and go without gathering momentum or excitement for change, and vocal critics can smother them. Despite inevitable opposition, Weinberger says, a massive tax bill is more likely to succeed than incremental change.

Public perception, however, may be a major obstacle. When Congress and the Administration do finally turn their attention toward taxes, they will do so mindful that the ever-increasing cost of the country’s major entitlement programs — Social Security, Medicare, and Medicaid — will demand (absent benefit cuts) ever-higher levels of federal revenues in the decades ahead. That could mean trouble for any initiative that resembles a tax cut for corporations, even if the net result actually adds tax revenue.

Accordingly, Rangel’s bill is expected to pair a lower corporate income-tax rate with measures aimed at rescinding some credits, incentives, and other exceptions in the current tax code. His 2007 bill, for example, proposed raising hundreds of billions of dollars by repealing the domestic manufacturing deduction, getting rid of LIFO (last in, first out) accounting, deferring expenses on foreign income, and limiting foreign tax credits. This time, according to an analysis by PricewaterhouseCoopers, he also might look at adding new limitations on accelerated depreciation.

Offshore Focus

In the Senate, Finance Committee chairman Max Baucus (D–Mont.) is pressing the search for fresh tax revenue, and profits earned offshore are a key focus. Baucus will reportedly target tax rules that govern deferral of taxes on foreign profits, international transfer pricing, and earnings stripping (a tax arbitrage between higher and lower tax jurisdictions that ducks U.S. tax liabilities). “We’ll look at a variety of issues,” a Baucus spokesman promised in late January. Details to follow, he said.

Discuss

Your email address will not be published. Required fields are marked *