Build Back Better Plan and Observations on Small Business Provisions

Tax items in President Biden's Build Back Better plan were modified a bit by the markup that passed in the House Ways and Means Committee on 9/15/21 (24-19 with one Democrat voting no). I just want to comment now on a few relevant to "small business" including a reminder of the need to apply critical thinking to understand changes and commentary on them including from elected officials.

1. Corporate Rate Change: President Biden proposed to increase the TCJA rate of a flat 21% to 28%. The Ways and Means markup doesn't got that high and brings back a graduated rate structure which includes a rate cut for corporations with taxable income of $400,000 or less. The markup rate structure is:

  $1 to $400,000             18%
  $401,000 to $5 million   21%
  $5,000,001 and above   26.5%
  $10,000,001 and above a surtax applies at 3% to phaseout the benefit of the graduated rates. At almost $20 million or more of taxable income, the corporation has a flat rate of 26.5%.

So, interesting that the markup partially reverses the corporate rate increase of the TCJA that occurred when the graduate rates as low as 15% were replaced with a flat 21% rate. But there are likely not a lot of C corporations with taxable income of $400K or less as they likely operate in as a different business entity type.

2. QBI Deduction: The TCJA temporarily added a qualified business income deduction for non-corporate entities to provide some equity for the rate cut that most C corporations got. This deduction at Section 199A exists for 2018 through 2025. While campaigning, President Biden proposed to reduce this for individuals with income above $400,000 but no change is included in his proposal of earlier this year. The markup caps the 199A deduction at $400,000 ($500,000 if MFJ). At a deduction rate of 20%, that means that once the business reaches $2 million ($2.5 million if MFJ) of qualified business income (income not gross receipts), it gets no more Section 199A deduction.

That is a high level of QBI and likely affects less than 1% of owners of non-C corporation entities. This seems like a high level and helps improve progressivity of our tax rates. That is, if someone in the top rate also gets a 20% deduction against their business income, that does bring the effective tax rate down.

3. A reminder of the need to be critical thinkers: A 9/22/21 press release from the House Ways and Means Republicans offers ten reasons to oppose the markup. Reason #3 says the markup will "hammer" small businesses struggling after COVID. It states:

"Higher 39.6 percent income tax rates (which is where most small businesses pay taxes)..."

I can't help but say "wow!" That is not the tax rate for the vast majority of small businesses. Less than 2% of individuals are in the top tax bracket. The markup imposes the 39.6% (rather than the TCJA top 37% rate) once a married couple filing jointly has over $450,000 of taxable income. Most small businesses don't have that much income. If they did, they really don't fall into the "small" category (as then, what is a medium or large business?). And again, less than 2% of individuals reach the top levels. The IRS reports that the top 1% of individuals had AGI, on average in 2018, of $540,009 (this is before itemized deductions and tax credits). The top 10% had AGI of $151,935.

Note: I realize that misstatements come from members of both parties. It is unfortunate since they have good access to correct data and many people believe they are using that data correctly.

Lets Fix This: There is a lot in the markup including various tax credits. I think there is a lot of new complexity added, perhaps as much as we had with the TCJA (a lot of which we have gotten used to by now though - but not a reason to add more). Missing from the bill, as with the TCJA, are stated goals of what are we trying to do and will this bill meet those goals? I attribute this to the process and having just one party craft the bill and then enact it via budget reconciliation which limits what all can go into the bill, and limits useful discussion and public comment.

Let's keep pushing for true simplification, neutrality and equity. There are a lot of complex, inefficient and inequitable provisions in our current law and they will still be there after this tax bill is enacted.

#letsfixthis  [my new hashtag]

What do you think?

Does TCJA Make C Corps Better?

Does TCJA Make C Corps Better? Generally no when you factor in double taxation of C corporations. I've got an article looking at this question but only looking at domestic tax rules. Certainly, lots of international activity might make the C corporation look better.  Here is the article, published this week in the Wealth Strategies Journal - https://wealthstrategiesjournal.com/2019/08/08/is-a-c-corporation-preferred-after-tax-reform/

What do you think?

States without an income tax - good idea?

California's largest tax revenue source by far is its personal income tax. This tax generated 67% of total tax revenues for FY 2012-2013's General Fund. As shown in the pie chart from the California State Controller's Office, the corporate income tax only provided 8% of state tax revenues.


Source: California State Controller

Seven states do not impose an income tax and two states impose it on only a portion of one's income. How can they do that? A recent article in Cleveland.com answers that question. See "No-income-tax states use other taxes to pay the bills: Axing Ohio's Income Tax," by Robert Higgs, 10/2/14.

The seven states without an income tax are:

• Alaska (relies on significant oil taxes)
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming (also relies on significant oil severance tax)

See the article for details on how the other states manage.

Is it good to not have a state income tax? I say no regarding the personal income tax and maybe regarding the corporate income tax. For states that don't have few people and lots of oil, lack of a personal income tax means greater reliance on the state sales tax, which is a regressive tax. While Nevada and Florida are able to get tourists to pay a good amount of the sales tax, that is not true in all states and Florida have a greater population than Nevada (for 2013, 19.5 million for Florida and 2.78 million for Nevada, per US Census Bureau).

The problem with the sales tax is that it results in lower income individuals using a larger portion of their income to pay it relative to higher income individual (making it regressive). In contrast, the income tax is progressive and even more progressive if tax rates increase with income. High income individuals get a significant tax break if their income is all earned in a state without an income tax. They likely only spend a small portion of their income, so do not pay much in sales tax (again, relative to their income).

Another benefit of having an income tax is that a balance of taxes can help improve revenue stability. For example, an economic downturn might hurt income tax revenues quickly, but not so quickly with respect to sales and property taxes.

So far as the corporate income tax, I think states should consider eliminating it. Already, most states have significant tax benefits to lower corporate taxes and entice corporations to do business in their state. The state will still make revenues from the spending and the wages paid to employees. The tax incentives include single sales factor apportionment (so state income taxes don't go up when you put more property and employees in the state), film credits, R&D credits and various energy and equipment purchase credits. These special rules also add more complexity to the law.

But, elimination of the corporate income tax is not as easy as it might sound. Many businesses operate as LLCs, partnerships or S corporations. The taxes paid by these entities mostly shows up in the personal income tax piece of the revenue pie. It doesn't seem fair to continue to tax these businesses, but not ones that operate in the corporate form. What happens if these businesses convert to the corporate form?  They still have federal income taxes. It could turn into a tax shelter as well if people place investment assets in corporations. Then you need rules to prevent that. So, we end up with a complex corporate income tax that produces a small amount of revenues. Oh well.

What do you think? (about a state having no income tax and elimination of the corporate income tax)

Real revenue sources for tax reform

To lower the corporate tax rate and perhaps also the individual income tax rate, in a revenue neutral rate means that revenue must be found to pay for the drop in taxes that would occur with a lowered tax rate. Tax preferences - special deductions, exclusions and tax credits would need to be eliminated or cut back. Some of the suggestions though, involve timing items. For example, making depreciable lives longer and methods slower just pushes more of the depreciation deduction to later years. It does not permanently raise revenue. It will show up though as a revenue raiser in a table that only shows the revenue effect for a limited number of years.

Where can permanent tax increases be generated to offset the desired permanent tax decrease generated from permanent lower rates?  I have a few suggestions pulled from a few government reports.  See "Real revenue sources for tax reform" in the 1/16/14 AICPA Tax Insider.

What do you think?

Growing support for lower corporate rate and territorial system

On 10/30/13, Senator Baucus issued a statement about the merger of California-based Applied Materials (manufacturer of semiconductor manufacturing equipment) with Tokyo Electron along with the reincorporation of the entity in the Netherlands. He referred to information from an October 8 New York Times article. Baucus noted that Applied Materials effective tax rate will decrease from 22% to 17%, saving about $100 million annually.

Baucus also observes that this type of restructuring is "a new spin on the old “inversion” problem.  And it’s becoming an increasingly popular practice."

Finally, he observes: "This is a simple issue. Globalization has made America’s tax code out of date."

October also brought us a report from the Joint Committee on Taxation - Modeling the Distribution of Taxes on Business Income (10/16/13). It analyzes the age-old question of who bears the burden of corporate taxes.  Well, to the extent some of it is borne by workers, that broadens the group of politicians interested in lowering the corporate tax rate.

And, we await the release of a tax reform mark-up from both tax committees.

What do you think should happen with the corporate tax rate and what it means for other forms of business?

Clearing a path to a lower corporate tax rate

What will comprehensive tax reform look like?

We hear a lot of talk from elected officials of both parties about the need to lower the corporate tax rate. There is also talk that it be done in a revenue neutral manner. That might mean different things to both parties. It might mean that there would be some revenue boost from lower rates (Republicans) versus more of a number crunching exercise (Democrats).

In 2011, the Joint Committee on Taxation estimated that it would cost $717 billion over ten years to lower the corporate rate to 28%.  Much of the revenue to make this revenue neutral comes from timing changes, such as slower depreciation. I think there will need to be an increase in the capital gains rate and cut back on some generous individual tax preferences (such as the exclusion for employer-provided health coverage and the home mortgage deduction) to help lower both teh corporate and individual rates.

I've got a short article in the 10/31 AICPA Corporate Taxation Insider on this topic - here.  I hope you'll take a look.

What do you think it will take to lower the corporate tax rate?

President Obama and Tax Reform

White House website; speech of 7/30/13

On July 30, 2013, President Obama laid out some items he would like to see as part of tax reform. A lot of pieces are missing, but given some of the things he said, such as lowering the corporate tax rate, bringing jobs back to the US, helping manufacturers, and simplification, I think he is likely talking about parts of the revenue items in his budget proposals of recent years and his tax reform frameworks.  I have these items laid out in a table that I assembled in May 2012 - here. I need to update it for his FY2014 budget proposals released in April, but many of the tax items are similar to his FY2013 budget (other than the need to address the Bush tax cuts).

Here is a summary from the White House website:

"Simplify the tax code for business

• End incentives to ship jobs overseas
• Lower tax rates for businesses that create jobs in the U.S.
• Lower tax rates for manufacturers
• Cut taxes for small businesses

Create good jobs

• Put construction workers on the job rebuilding our infrastructure
• Expand our network of high-tech manufacturing hubs
• Strengthen job training at community colleges
• Raise the minimum wage"

President Obama stated he would like to see tax reform paired with funds for spending to improve our infrastructure.  It is not clear how he will lower the corporate tax rate and generate funds - at least from what he said on July 30.  If you look at his FY2013 and FY2014 budgets, you'll see he can generate a lot of funds from increasing taxes of high income taxpayers (over $250K).  That includes cutting back on the tax benefit of itemized deductions and some exclusions, as well as implementing the "Buffett rule." The first item is the biggest revenue generator - about $40 billion per year. That's a lot compared to about $7 billion per year for repealing LIFO. And repeal of LIFO is really a timing difference, the other is a permanent tax increase.  (See page 343-344 of the Administration's FY2014 Greenbook.)

We need more details. I'll offer a few things to think about for now:

• Does he plan to lower only the corporate tax rates or also those for individuals? Most businesses operate outside of the corporate form. Also, to pay for the lower corporate tax rate, he'd have to reduce business breaks and that would affect all businesses (probably).
• It looks like he still wants to lower the corporate tax rate in a complex and not fully transparetn way - by increasing the Section 199 manfuacturing deduction for certain industries.
• Does everyone want a lower rate? Remember that only the top 1% of individuals are in the top rates. Even many large corporations today use existing tax rules to reduce their effective tax rate to below 25%.  A recent poll of small businesses by the US Chamber of Commerce found that 56% wanted a simpler tax law and only 22% wanted lower rates.
• Revenue neutral reform to lower corporate and individual rates to 25% which many Republicans are talking about will be hard pressed to find revenue unless they go after the bigger tax expenditures, such as the one President Obama has suggested about capping the benefit of certain deductions and exclusions at 28% and reducing the mortgage interest deduction.

President Obama says he will lay out more details over the next few months.  Sounds like a good strategy so he can gauge responses along the way and slowly try to build support.

What do you think?

Test your knowledge of corporate tax data

Part of any tax reform effort should be to understand the current system - the rules, who pays, how much, distribution of the tax burden, collection costs, enforcement efforts, in addition to reviewing how well (or not so well) the system meets principles of good tax policy.

I've got a short article in the AICPA Corporate Taxation Insider this week with 12 questions about the federal corporate tax system. The data comes mostly from the IRS Data Book.  Here is the first question:

For fiscal year 2012, ____% of net federal tax collections, approximately $237.5 billion, was from corporate tax returns. (view answer 1)

I hope you'll check out the rest - here.

President Obama's Budget Proposals and Corporations

On February 13, President Obama released his proposed budget for fiscal year 2013 and the “Green Book” of revenue proposals. The budget continues to call for economic stimulus provisions, such as extension of 100% bonus depreciation, as well as some international tax reforms and “loophole” closers. Key new items are proposals to encourage domestic job creation and retention. I have a short article in the AICPA Corporate Taxation Insider (2/23/12) on key items in the Greenbook relevant to corporations - here.

Subsequent to the release of the Greenbook, the White House and Treasury Department released "The President's Framework for Business Tax Reform" (Feb 2012). In this report, President Obama lays out his five principles of business tax reform:

1. "Eliminate dozens of tax loopholes and subsidies, broaden the base and cut the corporate tax rate to spur growth in America: The Framework would eliminate dozens of different tax expenditures and fundamentally reform the business tax base to reduce distortions that hurt productivity and growth. It would reinvest these savings to lower the corporate tax rate to 28 percent, putting the United States in line with major competitor countries and encouraging greater investment in America.
2. Strengthen American manufacturing and innovation: The Framework would refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.
3. Strengthen the international tax system, including establishing a new minimum tax on foreign earnings, to encourage domestic investment: Our tax system should not give companies an incentive to locate production overseas or engage in accounting games to shift profits abroad, eroding the U.S. tax base. Introducing a minimum tax on foreign earnings would help address these problems and discourage a global race to the bottom in tax rates
4. Simplify and cut taxes for America’s small businesses: Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns. 
5. Restore fiscal responsibility and not add a dime to the deficit: Business tax reform should be fully paid for and lead to greater fiscal responsibility than our current business tax system by either eliminating or making permanent and fully paying for temporary tax provisions now in the tax code."

I still need to read the report, but I have some initial observations and questions:

• Why isn't this incorporated into the FY2013 revenue proposals ("Greenbook")?
• What loopholes? If the Administration is referring to rules being used as intended, but that we just don't like anymore, they should just say they don't like them or be more specific as to why they are no longer needed.
• How will the business reforms tie to overall reforms of President Obama's September 2011 report, Living Within Our Means and Investing in the Future?
• Are the touted simplifications true simplifications? Too often that word gets used while the tax law gets more complicated with special rules, new definitions to add to the list of old definitions, new limitations, exceptions, etc. I see that on page 12 of the report, President Obama proposes different tax rates for manufacturing, advanced manufacturing and non-manufacturing. Most states (other than California) have a sales tax exemption for manufacturing equipment and there are often court cases addressing the meaning of "manufacturing."

I'll have more on that later as this weekend I'll work on an article comparing the February 2012 report on business tax reform, the September 2011 report on living within our means, and the FY2013 revenue proposals to see what the big picture of possible reform looks like and whether it moves our tax system into the 21st century and follows principles of good tax policy.

Rough Road to Even a 28% Corporate Tax Rate

We have heard suggestions for dropping the corporate income tax rate from its current 35% to perhaps even as low as 15%. Typical suggestions seem to be for 28% or 25%. President Obama and others will require that any decrease be revenue neutral.

Democrats on the House Ways and Means Committee asked the Joint Committee on Taxation to estimate what the rate could drop to if all tax expenditures were repealed either just for corporations or for all business taxpayers. The JCT's preliminary data was released earlier this month. It indicates that the lowest rate would be 28%, although it a longer budget window is used, it likely has to be higher.

I have a short article in the AICPA Corporate Taxation Insider (11/10/11) on the data and its implications. The vast majority of the "pay for" are timing items, such as using slower depreciation. That doesn't really raise revenue (at least in the long run). Some of the repealed tax expenditure are really simplifications, such as allowing small C corporations to use the cash method rather than the accrual method.

Links to the report and critique of this approach to pay for a lower rate, are included in the article. Also see 11/2/11 post.

The Tax Law with a Revenue Neutral 28% Corporate Tax Rate

Over the past few years, various numbers have been suggested for a lowered corporate tax rate. Typically, the range from 20% to 28%. This week, the Ways and Means Committee Democrats released a "very preliminary" (JCT words) estimate of what revenue-neutral rate is possible if all tax expenditures (special deductions and credits) are eliminated for corporations. The rate would be 28%. The Democrats are apparently touting this because Chairman Camp released a work-in-progress proposal called the Tax Reform Act of 2011. His proposal calls for a 25% corporate rate and a move to a territorial system (rather than worldwide) along with a few other international tax changes. He promises individual reforms and additional corporate ones at a later date.

I'll have more on this later, but a few things to consider now:

1. Would Congress really repeal ALL tax expenditure for corporations? The largest revenue raiser by far in the list of replacing MACRS depreciation with ADS depreciation (straight-line with longer lives). Just over 70% of the revenue raised to cover the "cost" of a 28% rate (about $71 billion per year) is from this MACRS change. Won't less favorable depreciation than we have now harm international competitiveness?

2. Won't there by some transition rules? They cost extra.

3. What will be the cost of other business entities that have a rate higher than 28% converting to C corporations?

4. Some tax expenditures, such as allowing small C corporations to use the cash method rather than the accrual method are for simplification purposes? What is the purpose of removing them?

5. Other than some credits that would go away, the changes mostly appear to be timing differences. This really doesn't raise any revenue in the long run. In fact, the JCT points out that if you look beyond a 10-year budget estimate, the revenue neutral rate is likely higher than 28%. Note that many credits are not included in the list because the projections cover 2012 - 2021 and many credits, such as the research credit expire before 2012.

For more information (again, I'll have more soon when an article of mine is published), see

• "Break-Free Corporate Tax Code Misses Republican Rate Goal," by Steven Sloan and Richard Rubin, Bloomberg, 11/2/11
• Democrats press release (11/2/11)
• JCT release with the "very preliminary" data
• Chairman Camp's Comprehensive Tax Reform proposal

What do you think?

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?

State corporate tax reform - things to consider

The February 25 Wall Street Journal included an article - "The State Business Tax Revolt Governors get a jump on corporate tax reform" noting that a few state governors, such as in Iowa and Florida, would like to reduce the state corporate income tax rate. The article contrasts this to President Obama's comment in his state of the union address to reduce the corporate tax rate although his FY 2012 revenue proposals do not include such a plan.

This all raises some questions such as, if states are having budget problems, why consider reducing a revenue source? The answer is economic development. Some lawmakers view a lower corporate tax rate as conducive to keeping and attracting business activity to the state. On the other hand, there are many, particularly individuals, who believe corporations have to pay their "fair share." These can be difficult positions to reconcile and the data is not clear as to what the right answer is.

Some considerations:

• Per 2009 US Census data, 9.4% of total tax revenues in California are from corporate income taxes (compared to 44% for the personal income tax and 29% for the sales tax). Similar data from the Federation of Tax Administrators shows that the average for the 50 states is that 5.6% of total revenues are from the corporate income tax.
• Ultimately, all taxes are paid by individuals. Taxes paid by businesses are ultimately paid by customers in the form of higher prices, employees in the form of lower wages or investors in the form of reduced earnings.
• An article from the Federal Reserve Bank of Kansas City - "Do State Corporate Income Taxes Reduce Wages?" by R. Alison Felix, noted that labor likely bears the greatest burden from the corporate income tax (page 83 - 84). The article notes that the corporate tax can cause corporations to seek the lowest tax rate. When a corporation leaves a state, there is less capital and workers become less productive and earn lower wages. The author notes that this can more adversely affect high-skill workers relative to low-skill workers because higher skilled workers may need access to high cost technology (capital).
• Businesses do use government services and the amount used can vary from industry to industry and the nature of the business. For example, a corporate sales office is unlikely to use as many government services as a shopping mall. But, is income the best measure of use of government services by businesses? Probably not.
• What exactly are corporate taxes? In addition to paying income taxes, they are also subject to sales tax, property taxes and a variety of other taxes including business license taxes at the local level.
• Many factors affect the corporate income tax making it difficult to determine the effect to the state's economy and coffers. For example, nexus interpretations, apportionment and sourcing rules.
• Not all businesses operate in the corporate form. Many businesses operate as sole proprietorships, or some type of passthrough entity (such as a partnership) or as an S corporation. Thus, corporate tax reform does not address the much broader category of business tax reform. Reductions in corporate tax rates may result in lower personal income taxes as other business forms decide to become regular corporations.

I think that a state repeal of its corporate income tax would be attractive to businesses, no doubt. But attractiveness also depends on other taxes it would pay. For example, in California, a business pays sales tax on its equipment and that is easily a 9% increase to the cost of the equipment. Many states exempt equipment purchases by businesses. Infrastructure is also a factor - education, roads, etc. Some local taxes, such as business license taxes may make some local jurisdictions unattractive.

But what about businesses contributing to their use of government services? I think this should be considered. Many of these costs are often local - traffic and police control, such as for a shopping mall. Business license taxes tied to type of industry might help local governments to better handle these types of costs.

It is a complicated analysis and of course, the corporate income tax should not be addressed in isolation of broader state and local reforms. Hopefully states considering reductions in corporate taxes will use that as a stepping stone to looking at the entire tax system and how it can be modernized and made to better meet principles of good tax policy.

Corporate Tax Reform on the Horizon?

A January 6, 2010 Wall Street Journal article - "Momentum Builds for Corporate-Tax Overhaul" by McKinnon and Williamson, states that while there is yet no consensus on how to do it, President Obama and Republicans in Congress are all noting that corporate tax rates need to be lower.

We'll see ... Some obstacles that come to mind for me:

• The recent enactment of the $858 billion 2010 Tax Relief Act - additional tax cuts might have to wait.
• Public perception that often views corporations as not paying their fair share (whatever that means) and not wanting to see the top corporate rate below the top individual rate (which is only temporarily at 35% rather than 39.6%).
• The stated top rate of 35% versus the typically lower effective tax rate many corporations report in their financial statements.
• Agreement on what offsets will accompany a bill to reduce the corporate tax rate.
• Other matters on the congressional agenda.

But, it looks like there will be additional hearings on tax reform. I say additional because there were such hearings in the 111th Congress - they didn't get much attention in the press though. I have a list of such hearings here.

What do you think?

Lowering Corporate Tax Rates

Despite a few years of various elected officials and business groups noting that the US corporate income tax rate is surpassed only by the rate in Japan, the rate remains unchanged.

I've got a short article from the AICPA Corporate Taxation Insider on the background and prospects for lowering the rate. It includes a brief summary of a few proposals offered to lower the rate.

What do you think should be removed from the base, if anything, to help lower the corporate tax rate?

Corporate Tax Under the Microscope

2007 was a year of examining our corporate income tax system and considering alternatives -- but only as a preliminary step to further discussions and debate.

The US combined federal and state corporate tax rate is one of the highest among industrialized countries due to reforms in those countries in the past several years. Many believe that lowering the federal income tax rate on corporations would help make U.S. companies more competitive in the global market. House Ways & Means Committee Chairman Charles Rangel included a corporate rate reduction in his "mother of all tax reform" bills (H.R. 3970) introduced in October 2007. That bill also included some base broadening to help pay for a lower tax rate.

But, there are many issues to consider:

1. Should the analysis only look at the statutory tax rates or the effective tax rate (tax as a percentage of income)? Many U.S. corporations have ETRs below the statutory rate.
2. Corporate tax revenues are already declining. What would be the effect on the budget and economy of lowering tax rates further?
3. Should a rate reduction be offset to make it revenue neutral? Some say no because the rate drop will lead to greater investment and revenue, others (including a recent report by the Congressional Research Service) say yes.
4. Unlike many other countries, a lot of business income in the U.S. is subject to the individual income tax rather than the corporate income tax because we have so many sole proprietorships and flow-through entities. Would corporate reform alone help businesses be more competitive?

For more information and a link to several studies and reports released in 2007, please see Corporate Tax Under the Microscope.

State Corporate Tax Reform - Combined Reporting

One of the proposals some states are pursuing to raise revenue and close perceived loopholes is to require combined reporting for businesses. California has used combined reporting for years.

In his 1/15/08 state-of-the-state address, Iowa Governor Culver proposed combined reporting for corporations. He observes that it would "level the playing field for Iowa small businesses" and "close a tax loophole [that allows] multi-billion dollar corporations that do tens of millions of dollars of business in Iowa avoid paying Iowa income taxes."

With combined reporting, corporate entities do not report their separate business activities to determine how much is apportionable to a particular state. Instead, they combine the results of all entites that are part of a "unitary group" such as subsidiaries. Combined apportionment factors are then applied to the unitary group to determine how much income is taxable in the state. The perceived benefit is that companies cannot use related entities to shift profits to low tax states. However, some believe it is not a fair way to calculate tax as it is more likely to attribute income to a jurisdiction to which it has no direct connection.

Combined reporting was proposed in Massachusetts in 2003 and in New York in 2007 (or perhaps even earlier).

The Center for Budget & Policy Priorities has a report on combined reporting and where it is used among states.

Is Governor Culver moving Iowa's tax system into the 21st century? Arguably yes. Combined reporting is more likely to better reflect the reality of how businesses operate today and the reality that separate entities exist for tax and non-tax reasons. His proposal is likely to lead the legislators and others to consider how best to move the state tax system into the 21st century's ways of doing business.

Business Tax Reform - New Reports

In the past few months, at least 3 reports on corporate tax reform have been issued:

1. Congressional Research Service (CRS), Corporate Tax Reform: Issues for Congress (10/31/07), 39 pages
This report focuses on calls for lowering the corporate income tax rate, which some label as the 2nd highest rate (combined federal and state) among industrialized countries. It also analyzes Congressman Rangel's "mother of all reforms" (H.R. 3970) which proposes to broaden the corporate base and lower the tax rate to 30.5%.

2. U.S. Department of Treasury, Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century (12/20/07), 121 pages.
This report provides some background on U.S. business taxation and compares it to other countries. It then lays out three possibiltiies for reform: (a) a business activity tax (BAT) which is a type of consumption tax, (b) a broadened income tax base and a lower tax rate including contrasting a lower rate with faster asset writeoffs and moving to a territorial system, and (c) reforming various aspects of the current system such as its preference for debt over equity.

See:

• Asst Secretary Eric Solomon's statement about the report.
• Treasury summary of the report.

3. OECD, Fundamental Reform of Corporate Income Tax (11/16/07), 131 pages

This report covers trends in corporate income tax, the reasons for a corporate income tax, types of corporate taxes, why countries are considering reforms, and types of reforms.

• OECD's Executive Summary

Additional corporate tax reform reports and proposals related to the above:

1. Rangel's H.R. 3970 - summary, text, prior blog post
2. Treasury's report and forum on Business Taxation and Global Competitiveness
3. The Future of the Corporate Income Tax, by Nellen, 10/07
4. Many links (and reports) on fundamental tax reform (web)

More later (I'm still reading the reports!)