Corporate Tax Reform – What is in? What is out?

Published by Michael Novogradac on Wednesday, May 11, 2011 - 12:00am

As corporate tax reform is discussed, and rumors and concepts swirl, here is a list of some possible components.  Remember, the goal is to reduce the top corporate tax rate from 35% to less than 30%, with the question of “how low can you go?”

To lower the top corporate tax rate, you need to eliminate various targeted tax expenditures, change foreign tax rules, and/or expand the number of entities subject to corporate tax.  So here is a list of items that would help Congress lower the top corporate tax rate.

  1. Tax pass-through entities as C corporations.  (Perhaps limit to entities with gross receipts > $50 million.)  Senator Baucus suggests this is a key component to lowering the rate below 30%.
  2. Repeal Section 199 manufacturing deduction.  (Appears to be a key component of corporate tax reform.)
  3. Repeal accelerated depreciation deductions. (Another key component of tax reform.)
  4. Repeal research and development tax credit.  (Less likely to be included, Obama has embraced the R&D.)
  5. Adopt territorial international tax regime. (Numerous foreign tax changes would be included, too many to discuss here.)
  6. Allow repatriation holiday so corporations can repatriate foreign profits to U.S.  (This would provide a temporary revenue boost, and as part of broader international tax changes, seems like low hanging revenue ‘enhancement’ fruit.  Use of repatriated funds may have strings attached.)
  7. Adoption of value added tax (VAT). (not likely at this time).
  8. Eliminate charitable contribution deduction.  (Does Congress want to take on charities?)
  9. Change inventory accounting rules. (Seems like an easy change if you are lowering the top corporate tax rate.)
  10. Eliminate research and experimentation deduction. (Obama has embraced the R&D tax credit, would he not embrace the deduction too.)
  11. Repeal Oil & Gas subsidies.  (Politically, this is very popular right now.)
  12. Eliminate interest exclusion of tax-exempt bonds. (This change penalizes the borrower more than the corporate debt holder; seems like bad policy to eliminate the exclusion of tax-exempt interest for C corporations.  Changes here should be done on the tax-exempt bond side.)
  13. Eliminate low-income housing, new markets, and historic tax credits.  (Similar to tax-exempt bonds, eliminating these credits penalizes low-income families, communities, and historic preservation.  Corporations ‘purchase” these credits so repeal doesn’t penalize corporations.  Would be bad tax policy to eliminate these.  Changes, if desired, should be done on the tax credit side.  Plus, over the next five years, repeal would NOT save much in tax expenditures.  See my earlier blog post on the topic.)