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Thursday, March 24, 2011

The Journey to a Lower Corporate Tax Rate

There have been a few congressional hearings, a comment by President Obama in his state-of-the-union address and a few other activities focused on prospects of lowering the corporate tax rate. The discussions have also raised questions about why so few businesses operate as C corporations. In fact, questioning at one hearing led to some statements that perhaps more entities should be taxed as C corporations. I think the intent was more looking at small versus large and the fact that not businesses operating outside of the C corp form are small. That led to Senator Snowe introducing S. Res. 88 saying that businesses should be free to choice their form. Interesting. I attempted to summarize the themes of the activities so far this year in discussions about lowering the corporate tax rate in an article in the AICPA Corporate Taxation Insider - The Journey to a Lower Corporate Tax Rate (3/24/11). In that article, I also have some links to some charts I prepared using IRS data on the mix of business entities in 1980, 1990, 2000 and 2007, as well as the receipts generated. I encourage you to take a look at the article. I also have some additional data here. So, key issues:

  • How to pay for a lower corporate tax rate? The Administration wants a revenue neutral approach.

  • Should the tax rules vary based on small versus large businesses or by type of legal entity?

  • What problems arise if the corporate rate drops while the individual rate likely goes up to 39.6% in 2013 (even higher with the new Medicare taxes)?

What do you think?

1 comment:

Jas. said...

In order to low the corporate tax rate without losing tax revenue, the administration has to broaden the tax base. One way to achieve the goal is to get rid of some of the tax expenditures, such as the §199 provision.

For most taxpayers, once a decision has been made what type of entity to form their business, they won't change the entity unless it's absolutely necessary. Tax impact is one aspect of their decision making process. Other factors, such as liability protection, flexibility to take funds out, or administrative costs would also be considered. On the other hand, business's size no matter in terms of revenue or assets could change every year or even every quarter. If tax rules vary based on the size of business, taxpayers will be motivated to report their business in a size range that will reduce their tax liability. Consequently, the tax gap and noncompliance will increase significantly. As a result, the tax rules should vary based on type of legal entity.

Most taxpayers won't compare individual tax rate with corporate tax rate. They understand that these two rates are like apple versus orange, they are in two different category. However, taxpayers will compare their rates with individual tax rates in other industrialized countries.