Corporate Tax Reform or Political Rhetoric?
President Obama's proposed corporate tax planmakes great political headlines. A president, who some have characterized as “anti-business,” serves up a reduction in the corporate tax rate from 35 percent to 28 percent? Surely this is bullish news for business owners and investors, right?
Not so fast.
On the one hand, the plan initiates a path towards simplification of the U.S. corporate tax code.
That is very valuable as business owners may better forecast the profitability of their operations. Moreover, a simplified tax schedule discourages businesses from "gaming the current tax system," thereby reducing inefficiency.
Indeed, by proposing a minimum tax on foreign profits and eliminating some provisions that currently allow corporations to shift assets to lower-taxed offshore entities, the proposed tax plan may induce some corporations to relocate operations and assets to the U.S. from abroad, thereby providing a boost to the U.S. economy.
Unfortunately, this plan — and almost any other proposal from either side of the political aisle — has little chance of becoming law until after the November elections. Our hamstrung Congress — and it's Congress that passes laws, not the President — cannot muster the collective willpower to move the needle one iota towards corporate tax reform. Watch both parties craft legislative proposals that cater to their constituents, highlight their philosophies, and lambast the opposing party's positions. It's an election year, after all.
Where does this leave us? With three sobering conclusions.
First, the President's proposal has numerous beneficiaries (e.g. current top taxpayers such as retailers and health service providers) and losers (e.g. multinational corporations as well as oil and gas companies).
Do you really expect those firms that would be hurt by the proposal to let it pass without putting up a valiant fight?
Secondly, streamlining the corporate tax code is just a first step in trying to eliminate our nation's $15-trillion-and-growing deficit. Without serious reformation of our healthcare and Social Security systems, altering our corporate tax code is akin to rotating a set of bald tires on a car. The benefits of corporate tax law reform are dwarfed by the need for other major structural changes.
Lastly, guess what happens to a successful business owner and investor in 2013 as the Bush era tax cuts expire.
Putting aside the numerous potential increases in state income tax rates and sales tax rates being proposed this fall, successful entrepreneurs and investors may endure a number of chilling changes (per David Rosenberg of Gluskin Sheff):
A) An increase in their top federal income tax rate from 35% to 39.6%;
B) A reduction or removal of various itemized deductions adding a further 1.2% increase in their top federal income tax rate;
C) Potentially a new 0.9% Medicare tax imposed on incomes over $200,000 ($250,000 for couples);
D) An increase from 15% to 20% on the long-term capital gains tax rate;
E) Dividends will be taxed at 39.6% for top income earners, not the 15% we have enjoyed for the past ten years;
F) High income earners will also be subjected to a new 3.8% tax on investment income; and
G) The top estate tax rate goes from 35% to 55%, while the estate tax exemption falls to $1 million from $5 million.
So kudos to any corporate tax reform plan that helps engage an informed debate and highlights areas of potential improvement in our nation's economy. If only politics and the inability to focus on "the real issues" wouldn't get in the way of real reform.
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