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Equalizing Rates Among Disputed Details In Code Revision: Taxes - US

22 November 2013   (0 Comments)
Posted by: Author: Don Frederick
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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 individual rates.

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 proprietorships.

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 taxes.”

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.

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