Problems Seen For Stand-Alone US Corporate Tax Reform
08 May 2013
Posted by: Author: Mike Godfrey
Source: Mike Godfrey (Tax-News.com, Washington)
While there appears to be a growing political consensus that revenue-neutral corporate tax reform that would lower the current 35% United States tax rate by drastically reducing corporate tax breaks could be possible, the Tax Policy Center (TPC) of the Urban Institute and Brookings Institution has noted that such reform on its own faces a big practical challenge from non-corporate businesses.
Although individual tax reform appears much more contentious, the TPC confirms that, if Congress pursues corporate tax reform by itself, it will come up against the problem that many corporate tax breaks also apply to non-corporate businesses, which are taxed under the individual income tax. Efforts to broaden the corporate base could therefore have significant effects on individual income taxes, making it difficult to pursue corporate reform separately.
The TPC points out that the Joint Committee on Taxation recently identified about USD1.3 trillion in income tax expenditures in 2013. However, the vast majority, more than USD1.1 trillion, operate through the individual income tax, and, of those, more than USD1 trillion have no link to corporate income taxes.
For example, the mortgage interest deduction and the exclusion of employer-provided health insurance operate exclusively through the individual income tax. As a result, the TPC concludes, "it is possible to talk about major, base-broadening reform of the individual income tax without worrying much about collateral effects on the corporate income tax."
However, it finds that "the reverse is not true for efforts at corporate tax reform." Partnerships, S corporations, sole proprietorships and other passthrough entities take advantage of many of the same business tax breaks as C corporations, including accelerated depreciation and the domestic production deduction. In addition, some corporations get the same tax breaks as individual taxpayers, as with the exemption for interest on municipal debt.
As a result, it calculates that, of the USD150bn in corporate tax expenditures, only USD69bn comes from provisions that operate solely through the corporate income tax (primarily the deferral of foreign income by multinationals). The other USD81bn comes from provisions that also reduce individual income taxes, and would complicate efforts to pursue corporate reform separately from individual reform.