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2014 To Become Crucial Year for Congressional Policymaking on Tax Reform

October, 2013 The Capital Press

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Tax Reform on the Horizon?• Earlier this summer, The New York Times featured

a great article by David Leonhardt covering the U.S. corporate tax system and the likelihood of its reform in the near future. One of the main points in the feature is the staggering variation in the corporate tax rates for financial entities in various sectors. Companies with quickly mobile items, such as concentrate used to make soda, can quickly move operations to low-tax territories. Those with intangible capital like software application production can structure their accounting so that earnings are reported in low-tax jurisdictions.

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Top Corporations Disclose Tax Rates

• According to information conducted by financial research company S&P Capital IQ (and also mentioned by the New York Times),revealed the total tax rate (including federal, state, local, and foreign taxes) of the following businesses were: Amazon.com, 6 percent; Boeing, 7 percent; Apple, 14 percent; General Electric, 16 percent; Google, 17 percent; eBay, 19 percent; and FedEx, 23 percent. These tax rates are astoundingly low when one considers that the nominal U.S. corporate tax rate is 35 percent, which does not take into consideration state or civic taxes.

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Low and High-Tax Jurisdictions

• On the other hand, businesses with brick-and-mortar operations, commonly merchants, pay larger total tax rates: Wal-Mart, 31 percent; CVS, Best Buy, the Gap, and Whole Foods all ended up with rates between 35 and 40 percent. Exxon Mobil, due mostly to high foreign tax rates, paid 37 percent. Small businesses that do not have international operations are not able to get an advantageous tax rate by routing profits to a low-tax jurisdiction, although they can of course pick to include in a specific U.S. state to lessen taxes.

• The trouble with the variation in exactly what should be a fixed corporate tax rate is that the tax code is effectively choosing losers and winners instead of leaving that choice to the free market. There is no prepared reason for why the maker of soft drinks ought to be taxed at a lower rate than the soft drink vendor. There is considerable agreement throughout the political board that the nominal corporate tax rate should be decreased (maybe to 25 percent) and particular deductions and tax credits eliminated; although, whether that initiative must be revenue-neutral is the topic of much controversy.

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Lobbyists v. Leaders• While there is bipartisan support for a new tax code

amongst political leaders, business lobbyists could possible frustrate matters. Consider this: a team of businesses named “Let’s Invest for Tomorrow (LIFT)”, that includes brand names such as Coke, Caterpillar and P&G, would like to move the U.S. to a “territorial” tax system. Under this system, the U.S. would only tax the part of a business’s earnings that is earned as a direct outcome of U.S. operations. Under the current “worldwide” system of taxation, the U.S. imposes tax law on U.S.-based businesses on their worldwide profits but later grants them credit for what’s paid to overseas governments.

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Proposed Solutions, Speculations

• The problem with LIFT’s proposal is that it permits large entities to simply transition their operations to low-tax foreign locations, while smaller American companies pay far greater rates. Naturally, accurate arguments can be made for lower tax rates, however it is antithetical to modern taxation to tax large, U.S.-based multinational companies at lower rates than smaller ones with exclusively domestic operations, particularly when international businesses heavily depend on advantages offered by the United States (a court system with well established legal precedents and a vast, regulated safeties market, for instance). The feature recognizes that a compromise is possible; the U.S. could utilize a territorial system while enforcing a minimum tax on U.S. companies. So if an American soda-maker relocates their operation to another continent and pays a tax rate of 3 percent, the U.S. could impose a tax on the company’s revenues to the point that it is taxed a specified minimum rate (for example, 15 percent) on its international revenues. Policymakers have shown that the reform might be an essential part of 2014’s plan. T.C.P

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The Capital Press

http://thecapitalpress.com