“I am 100% optimistic that we will have tax reform,” he says. “You can’t be competitive over the longer term under the current system, and the deficit issue will draw attention to the tax side as well as the revenue side of our national balance sheet. However, I am a lot less sure that it will happen before the next Presidential election. In fact, I don’t think we are going to have it before then.”
Randy Myers is a contributing editor of CFO.
Should Tax Reform Go All-In?
Many analysts say it would make more sense to tackle the entire tax code at once rather than focus solely on corporate taxes. As Ernst & Young global vice chairman of tax Mark Weinberger notes, corporate taxes now account for only about 9% of federal revenues, in part because of the increased reliance on payroll taxes and the fact that an increasing number of businesses have chosen to operate as pass-through entities, such as partnerships and S corporations. At those firms, profits pass through to the owners, who are then taxed at individual rates. “You’re leaving out 75% of the business entities in this country that contribute 40% of businesses’ net income and a third of business tax receipts,” he says.
And it could be hard to get the corporate rate low enough to be globally competitive yet still meet President Obama’s goal of revenue neutrality by trimming corporate tax expenditures alone. But the tax code is full of plump incentives for individual taxpayers that could be targeted, including the deduction for mortgage interest that the Office of Management and Budget expects to cost $104 billion this year; the exclusion for health insurance, which will cost $177 billion; and the charitable deduction, which will cost $51 billion.
Tackling corporate and individual taxes separately also could result in a corporate rate lower than the top individual rate. That could encourage corporate executives to “hide” some of their salary in their companies and take it out later in a form that takes advantage of potentially lower tax rates on dividends or capital gains.
Finally, cutting only the corporate rate and simultaneously eliminating corporate tax incentives could penalize pass-through business entities. They would be left paying taxes at the higher individual rate, and would lose the tax incentives they now enjoy. — R.M.