Equalizing Rates Among Disputed Details In Code Revision: Taxes - US
22 November 2013
Posted by: Author: Don Frederick
Author: Don Frederick (Bloomberg)
Beneath the bipartisan push by key
lawmakers to revise and simplify the U.S. tax code lies a
simmering debate over whether to equalize top corporate and
Tax policy analysts say that setting the same top rates for
both categories would give corporations less reason to structure
their businesses based solely on avoiding higher levies,
Bloomberg BNA reported. That may lead to greater job creation,
the analysts say.
The House and Senate lawmakers leading a drive for the
biggest tax-code revision since 1986 have so far staked out
different positions. Representative Dave Camp has called for
cutting the top corporate and individual tax rates to 25 percent
each, while Senator Max Baucus favors lower corporate rates and
hasn’t yet committed to equal rates on the individual side.
"I’m not going to commit him to anything,” Camp said
Camp, a Michigan Republican who’s chairman of the tax-writing
House Ways and Means Committee. "We’re working together, we’ve
got very good discussions. We’re both trying to move this issue
forward but I’m not going to comment on where he might be.”
Camp’s proposal would bring down the top corporate rate
from the current level of 35 percent and the top individual rate
from 39.6 percent. His proposal is popular with other Republican
lawmakers and some business groups, who say it will help small
companies and put the U.S. on more equal economic footing with
lower tax countries.
"I think it’s very important that we try to get those
together,” Camp, a Michigan Republican, said in an interview.
"Right now there’s quite a disparity,” and that difference
creates unintended effects, he said. Revenue Issue
A Baucus spokesman told Bloomberg BNA earlier this week
that the senator hasn’t said whether he wants the rates
integrated. Camp, who meets regularly with Baucus to discuss
revising the tax code, declined to say whether he and Baucus
agree on the rates issue.
A basic partisan divide in the discussions over revising
the tax code is whether the effort should generate more revenue
for the government. Democrats, led by President Barack Obama,
say yes; Republicans, committed to shrinking the size of
government, say no.
Camp’s proposal to cut and equalize the top corporate and
individual tax rates is designed to be revenue neutral, with
changes to unspecified tax breaks helping make up for money lost
through lowering the rates. Job Creation
Businesses likely would be financially healthier and create
more jobs under a tax code that treats corporate and individual
income more similarly, said Brian Reardon, executive director of
the S Corporation Association, which advocates for businesses
that file as so-called pass-through entities. Those include
mainly closely held companies, not publicly held corporations
that can’t easily change their corporate structure.
"I think you’re going to start seeing ill effects right
now” from the difference in rates, Reardon said in an
interview. "We need to tax all forms at the same top rate.”
He and other tax policy analysts say the current 4.6
percentage-point gap between the top corporate and individual
rates may encourage businesses to organize as C corporations
instead of pass-throughs for reasons that don’t involve economic
growth. That’s because the higher individual rates apply to
pass-throughs, which along with S corporations include sole
The top tax rates were the same, 35 percent, for corporate
and individual sides of the code from 2003 through 2012. At
other times, the rates have diverged widely. Maximum Rate
Top individual rates reached their maximum -- 92 percent
for taxpayers with $400,000 or more in income -- in 1952 and
1953, whereas corporate rates topped out 40 percentage points
lower, at 52 percent.
In 1991 and 1992, the top corporate rate was three
percentage points higher than the top individual rate of 31
percent, according to data collected by the Tax Policy Center
and the National Taxpayers Union.
In the American Taxpayer Relief Act that took effect at the
start of this year, Congress allowed the individual rate to
climb to 39.6 percent on taxpayers with incomes greater than
$400,000, which was the rate from 1993 to 2000.
"From 2003 through 2012, the top rate on individuals,
pass-through businesses, and C corporations was effectively the
same -- 35 percent. This parity meant that taxpayers had little
incentive to move income from one source to another, which meant
business owners made decisions based on their business needs and
not on the tax code,” the S Corporation Association said in
comments submitted in April to the House Ways and Means
Committee’s working groups on a tax-code revision. Undue Influence
Some businesses will let tax rates influence their
decisions about corporate structure, Joseph Perry, partner in
charge of tax and business services at Marcum LLP in New York
City, said in an interview. Still, he said, a prudent tax
adviser wouldn’t suggest giving tax rates so much weight. Small
businesses that need steady cash, for instance, are typically
better off filing as S corporations or partnerships, Perry said.
"Taxes should never drive business considerations,” Perry
said. "You need to focus on business decisions, one of which is
If the number of tax filings under C corporation status
were to gain ground on S corporation filings, that would reverse
a trend. From 1986 to 2007, the number of S corporations filings
grew steadily, eclipsing all other corporate filings in 1996 and
reaching 4 million in 2007, the Internal Revenue Service said. Senate Challenge
Reardon said his group has made a "considerable amount of
progress” in making its case for equitable rates to lawmakers
in the House, where Republicans have the majority.
"I think our challenge is to take it over to the Senate,”
he said. That chamber is controlled by the Democrats.
Baucus this week began releasing segments of his plan for
restricting the tax code. Under a proposal he outlined Nov. 19
targeting the international tax system, the corporate rate would
be lowered by an unspecified amount. He also would end a rule
that has encouraged companies to accumulate about $2 trillion in
earnings in their foreign subsidiaries and impose a 20 percent
tax on those stockpiled profits.
Yesterday he called for tougher penalties for identity
theft committed through the tax system, expanded electronic tax
filing, and clearer authority for the Internal Revenue Service
to regulate tax preparers.
This article first appeared in bloomberg.com.