Monday, February 27, 2012

U.S Corporate Tax Reform on the Horizon


For the first time in twenty-five years, it appears the U.S. business tax code will undergo significant change. President Obama proposed dropping the U.S. corporate tax rate from 35% to 28% in an effort to align America’s corporate tax structure with other developed economies and encourage economic growth in the U.S by incentivizing companies already on U.S to soil remain and making America more attractive in the global competition for business investment and development.

President Obama’s proposal seeks to eliminate subsidies and loopholes in the business tax code that give preferential treatment to certain industries and cost the U.S. government billions in lost tax dollars. The plan eliminates unfair and outdated industry-specific tax breaks and deductions for U.S. companies that relocate abroad. As an economic stimulus, the plan calls for permanent incentives in the form of tax deductions and depreciation benefits for U.S. manufacturing companies, tax credits for companies that return off-shore or overseas operations back to the U.S, and a new minimum tax for foreign earnings (currently foreign earnings are not taxed if they are kept abroad). To encourage small business growth, the proposed business tax code would simplify and reduce taxes on investment in and by small companies. Analysts estimate that the President’s current proposal will cost nearly $1 trillion; however, President Obama claims the elimination of tax breaks will pay for the plan without adding to the deficit.

Proponents of the business tax code revision note that the U.S. corporate tax rate is the second-highest in the world behind Japan and that failing to substantially revise and reduce the business tax code will hinder economic growth and competitiveness. Detractors claim that changing the corporate tax rate will dramatically reduce government revenues and increase the national deficit. Critics also claim the revisions fail to account for cheaper labor markets in other countries that play a role in luring businesses abroad.

While there is a general consensus that the business tax code should be reformed, political posturing during an election year makes it unlikely that Congress will approve President Obama’s proposal. Despite nearly a year and half of work on the proposal by the U.S. Treasury Department, critics are already demanding greater detail while also claiming the proposal is too complicated. Some observers negatively compare President Obama’s proposal to presidential candidate Newt Gingrich’s proposal of a flat corporate tax of 15% with no exemptions or deductions. While the national debate over the exact nature of U.S. corporate tax reform appears to have just begun, there is no disagreement that reform is indeed necessary.

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