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Wednesday, April 4, 2012

Reforms desired by businesses

Recently, the Kogod Tax Center at American University and Bloomberg BNA released the results of a survey where advisers of both small businesses (less than $10 million of gross receipts) and medium-large businesses were asked how they would rate 15 tax reform proposals. The result was that 7 had similar support from both groups. Per the Kogod website: "The findings provide strong evidence that any tax reform bill would have to contain these measures to win the support of businesses."

The seven reforms:
  1. 100% expensing of assets
  2. a lower tax rate for corporate and passthrough entities
  3. reduced payroll taxes for employees
  4. elimination of the estate tax
  5. clarification of rules on worker classification
  6. replace the income tax with a national sales tax or other consumption tax
  7. a single, flat rate income tax
Looking at more details of the survey, the top reforms desired by small businesses are not listed above - repeal of the AMT which was tied with lower payroll taxes for employers. The top reform for medium-large businesses was 100% expensing of assets.

I encourage you to read the article on the survey, written by Dave Kautter, managing director of the Kogod Tax Center (and formerly a partner in the Ernst & Young National Tax Practice, and my boss a long time ago.)

Some observations I'd like to make:
  • One possible way that has been suggested to pay for a lower corporate tax rate is to change from MACRS depreciation to Alternative Depreciation System (ADS) with longer lives and slower methods. I think this flies in the face of trying to make U.S. firms more competitive internationally (see my article on challenges of reaching a lower corporate tax rate - here). The Kogod/BNA survey indicates that businesses want to move in the other direction - immediate expensing of assets! How will this affect efforts to lower the corporate tax rate in a revenue neutral manner?
  • Reform discussions and the realities of finding revenue offsets to extend the 2001/2003 tax cuts for everyone and lower the corporate tax rate likely means that while we might see a lower corporate tax rate in the near future, we will see higher taxes on high income individuals including on qualified dividends. This all makes it difficult to know the tax rate any business is truly taxed at. Why not move to a system where all businesses are taxed the same with elimination of double taxation in the process?
  • Why do businesses want lower payroll taxes for employees?  What about future shortfalls in the Social Security Trust Fund and the increase in the number of retirees to workers?
  • Replacing the income tax with a consumption tax would be a risky experiment. It also is contrary to international competitiveness in that other countries have a VAT and an income tax.
What do you think?

1 comment:

Dana said...

It is possible that the income tax could be replaced with a consumption tax in the near future?

I do not think we will see a complete replacement of the income tax with a consumption tax because of significant transitional issues that will impact individuals and businesses. For example, a family that is not paying any income tax due to the fact that they live under the poverty line will need to pay tax for every product that it will buy (assuming a replacement of the income tax with a consumption tax). The replacement of the income tax with a consumption tax raises another concern regarding the progressive rate structure - under the actual U.S. tax system, it is easier to keep a progressive tax rate structure and higher incomes get taxed at higher percentages than lower incomes. Consumption taxes are by nature regressive because the low and middle income individuals must spend more of their money on taxes than high income individuals. Even though a consumption tax might encourage people to save more instead of spending, the high income individuals will do most of their savings because the individuals from low or middle income class typically spend a larger percentage of their income than the individuals in the high income class.
On July 26th, 2011 the House Ways and Means Committee held a hearing to evaluate the pros and cons of two different consumption taxes to replace the income tax: FairTax (that calls for replacement of actual income tax with a national sales tax) and the Value-Added Tax.
The Committee heard from a variety of economists, among them advocates and opponents of both models explained the pros and cons of those different consumption taxes. One of the Panelist Bruce Bartlett, a former Treasury Department economist in the Reagan Administration, enumerated several problems with the Fair Tax and called the proposal “pie in the sky”. “I just don’t think it will work,” he said of the FairTax. “It is the most pie-in-the-sky major tax reform I have ever heard of. Even by tax policy standards, it is grossly complex, a virtual Rube Goldberg contraption of pieces that are unworkable individually and become exponentially more unworkable as they are layered on top of each other. The idea that this is a simple form of taxation is nonsense.”
What is interesting about this hearing is that they focus only on analyzing these two forms of consumption tax and did not discussed the possibility of replacing the income tax with a the flat tax or consumed income tax. A pure flat tax model eliminates all loopholes and tax breaks, ends taxation of investment income, and puts everyone within the same tax bracket regardless of how much they make. However, it brings issues that state government would face it if the current federal tax system were to be replaced with the flat tax because state and local governments have
come to rely on a large number of features of the existing federal income tax system. Taking away any of these features could create complexity at state and local government's level and maybe the House of Ways and Means Committee try to avoid adding more complexity to the tax system.

Article: Hearing on Tax Reform and Consumption-Based Tax Systems; Author: The House Ways and Means Committee; Date: Jul 26, 2011; Website: