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Monday, June 6, 2011

House Hearing on Business Tax Reform

On June 2, 2011, the House Ways & Means Committee, continuing its series of tax reform hearings, held one on Business Tax Reform and Job Creation. Per Chairman Camp, the purpose of the hearing was to:

"consider a number of issues related to business taxation as part of comprehensive tax reform. These issues include differences between tax accounting and financial accounting, the treatment of inventories and depreciable property, and trade-offs between marginal tax rates and targeted business tax preferences. The Committee must investigate the purposes behind these various rules and provisions, and whether such rules and provisions serve their intended purpose. The fact that the United States is an outlier with respect to the rates at which it taxes business income, combined with the complexity of the rules governing business taxation, make it important for the Committee to explore whether tax reform that broadens the base and lowers marginal rates could benefit the U.S. economy and American workers."

I'm glad he offered that explanation because otherwise, to me, the hearing sounded like it might be looking at what incentives should be added to help increase hiring.

The Joint Committee on Taxation report (JCX-34-11) for the hearing explains many of the areas Chairman Camp mentions in his statement above. Chairman Camp notes the need to review business tax preferences to see if they are serving their intended purpose. Well, in the area of credits, the committee will be busy. Here is the list of 32 general business credits for 2011 that are listed in the JCT report:

1. Rehabilitation credit (sec. 47)
2. Energy credit (sec. 48)
3. Advanced coal project credit (sec. 48A)
4. Gasification project credit (sec. 48B)
5. Advanced energy project credit (sec. 48C)
6. Work opportunity credit (sec. 51)
7. Alcohol fuels credit (sec. 40)
8. Research credit (sec. 41)
9. Low-income housing credit (sec. 42)
10. Disabled access credit (sec. 44)
11. Renewable electricity production credit (sec. 45)
12. Empowerment zone employment credit (sec. 1396)
13. Indian employment credit (sec. 45A)
14. Employer Social Security credit (sec. 45B)
15. Orphan drug credit (sec. 45C)
16. New markets tax credit (sec. 45D)
17. Small employer pension plan startup cost credit (45E)
18. Employer-provided child care credit (sec. 45F)
19. Railroad track maintenance credit (sec.45G)
20. Biodiesel fuels credit (sec. 40A)
21. Distilled spirits credit (sec. 5011)
22. Advanced nuclear power production credit (sec. 45J)
23. New energy efficient homes credit (sec. 45L)
24. Energy efficient appliance credit (sec. 45M)
25. Alternative fuel refueling property credit (sec. 30C)
26. Mine rescue team training credit (sec. 45N)
27. Agricultural chemicals security credit (sec. 45O)
28. Differential wage payment credit (sec. 45P)
29. Carbon dioxide sequestration credit (sec. 45Q)
30. Alternative motor vehicle credit (sec. 30B)
31. Plug-in electric drive motor vehicle credit (secs. 30 and 30D)
32. Small employer health insurance credit (sec. 45R)

That is a lot of credits! The result:

  • A more complicated tax system.
  • Inequities in that some activities and industries are favored over others.
  • Inefficiencies in that the free market is distorted and investment in some activities is favored over others.
  • Lack of transparency as to what your true tax rate is.

I'll post again later on this hearing because there were some interesting statements made by those who testified on June 2 - mostly executives of large corporations. For example, Walter Galvin, Vice Chairman and former CFO of Emerson stated:

"First, U.S. tax policy should be equitable so as not to distort business decisions. Equitable tax policy treats all business income equally, notwithstanding the industry, how a company is structured, or whether it is headquartered in the U.S. or offshore.

"Second, tax reform should be revenue neutral. Our fragile economy would likely react negatively to a large money-grab through higher corporate taxes.

"In closing, we can’t create jobs at home if we punish those who headquarter here rather than overseas. There is no reason why American companies should not be able to compete and win anywhere in the world. But we need a level playing field."

Sounds like a vote for removing the 32 credits and other provisions (tax expenditures) that distort behavior.

What do you think?

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