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LIVEBLOG: Breakfast Briefing on Corporate Taxation
This post was live-blogged on April 27. Please scroll to the bottom of the page for the first entry.
You can also view the webcast here.
Dixon: Might as well change the code for everyone at once, not just corporations, or just individuals. Like in 1986, when there was sweeping reform.
The session is now closing. Thanks for joining in the conversation via CPA.Blog!
Dubay: I dont see [value-added tax] happening anytime soon.
Shaviro agrees: "I dont know if the political system is well functioning enough to field that."
Audience comment: "We are one of probably the only country in the top 20 that allows ... exorbitant profits on health care. This is a dire situation we're in."
Audience question: Allowance for corporate capital. Is it practical to give corporations a tax benefit for paying dividends and then tax the dividends to the people receiving it?
Shaviro: "In a world where you had no administrative problems, there would be no such thing as a corporate tax. Thats not practical. That would be the ideal. When the Bush administration proposed dividend exemptions ... it proved to be somewhat of a mess."
Panelists are now taking questions from an audience of about 90 in person and others joining in via webcast.
Dixon: Can you talk about what's the most efficient way to look at broadening the base?
Merrill: The president laid out his vision for corporate tax reform in his State of the Union. It should be done in a way that doesn't add to the deficit. It means revenue neutral in the business sector, it may mean revenue neutral in the corporate part of the business sector -- that part is a little unclear. Almost by definition, if you're offsetting ... using base broadeners, then the effective tax rate is not going to change very much. Some question economically if this is the right approach, broadening the base. But that seems to be the world that we're in right now. I agree with Kim (Dixon) there's little appetite for taxes to go up on individuals to pay for corporate rate cuts.
Shaviro: Called health insurance "an expensive tax benefit" but said it's "political suicide" to touch that. "We look at the enemy, and they are us," he said.
"It will be very interesting to see what the Treasury comes up with," Shaviro said.
Daniel N. Shaviro, Wayne Perry Professor of Taxation, NYU Law School: "The seemingly simple case for lowering the corporate rate."
Shaviro said with global capital mobility, countries face the pressue of tax competition.
"By lowering one's tax rate for mobile capital, one may increase one's share of both real domestic and reported domestic tax revenues from cross-border activity," he said.
Federal budgetary concerns: "We are on a potential path to a fiscal disaster." Disastrous market effects could happen anytime, he said.
Pay-for problem: "Political economy issues make this inherently a steep and politically unnatural uphill climb."
"By definition, revenue-neutral tax reform has winners and losers," he said.
Shaviro is identifying some potential business and corporate sector pay-fors. "Some painful trade-offs involved there."
Structural issues: "Tax policy 101 says first you get the base right, then decide on the rate."
"The big issue is debt versus equity," he said. "Arguably better than, or at least prior to, reducing the corporate rate wuld be adopting an allowance for corporate equity ... or allowance for corporate capital, whether debt or equity," he said.
"But what about the shareholder level?" he said. "It would be foolish not to think about it."
Shareholder-level taxation: "With a lower corporate rate, revisit the 15 percent dividend rate?"
Shaviro said there is a "rising recent consensus that double taxation should mainly be addressed at the entity level."
International tax reform: "Dividend holidays are a terrible idea, but exempting foreign source active income has increasing support .... Territoriality plus changing the source rules could raise revenue," he said.
Merrill: "In terms of incentives for innovation, the U.S. basically invented the research credit, in 1981." He said the U.S. credit, when compared to other countries, is not overly generous. "We have an unstable incentive for RD. If you can't count on it, it's hard to have a real impact," he said.
"It's been mentioned by Larry and Curtis," he said, referencing the other panelists, "U.S. companies [see] their taxes are lower on earnings abroad [and] they dont want to bring the income back and invest it in the United States. It's better to reinvest it abroad. It is literally a disincentive to invest the money back in the United States."
Peter Merrill, director of national economics and statistics, PwC, is discussing benchmarking the U.S. taxation of business income.
"What does it mean to be competitive: you have to look at what other countries do," he said, and is now using graph to show how the U.S. stands against other countries. "The U.S. looks very lonely there at the top."
"There are a number of studies that look at the effective tax rate," he said. "Whatever measure we use we find the U.S. is often in the top quartile."
Discussing 2007 Treasury report. "Some claim that the U.S. corporate [effective tax rate] is low by OECD standards," he said. "However, as the report notes, the U.S. share of business income in flow-through entities is much higher than in other OECD countries."
He noted that the Treasury report also shows that U.S. corporate tax as a share of "corporate surplus" is low compared to the OECD average. (Corporate surplus is corporate GDP before interest and depreciation deductions; "value added by the corporate sector.")
"I think it is quite clear, I think it is almost indisputable, we have the highest tax rate, the highest effective tax rate," he said.
Dubay: "There is a nationalistic issue at play here too. Our biggest and oldest brewer is now a European company. If we don’t lower our corporate tax rate soon we could be saying goodbye to other corporations we’ve long proudly cited as American companies because they’ll be bought up by foreign companies too."
Dubay's bottom line: "If we want corporations paying more taxes we want a faster growing economy so they have domestic income to tax. We will get a faster growing economy from a lower rate."
Dubay provided a chart to attendees: "You can see the movement of the different nations and how the U.S. has fallen behind," he said.
"In it you see Japan listed number one. Late in 2010 the Japanese government announced they would reduce their rate to 35 percent this year," he said. "The recent disaster there has called into question whether the reduction will in fact go ahead as planned.
"Whether we are number one or number two by a few tenths of a percent is irrelevant. Our corporate income tax rate is much, much too high."
He pointed out that the rates he is discussing are statutory marginal rates -- the rates specified in law. "Many analysts argue that it is not this rate that matters but the marginal effective tax rate that is most important," he said. "The only way to bring the effective rate down to international standards is to lower the statutory rate."
Dubay: The U.S. ended up with the highest corporate tax rate in the industrialized world by standing still while other countries aggressively reduced their rates. "In the 1980s we were ahead of the curve by cutting our rate," he said. "By 1990 our rate was below the average of other developed nations in the Organization for Economic Cooperation and Development."
Starting at that time other countries realized they could attract capital and the jobs that come with it by reducing their rates as well. In the last 20 years, every other country in the OECD reduced their corporate tax rate, he said.
"During those years the United States slept," he said. "We ignored international trends and actually increased our rate in 1992."
Curtis Dubay, senior tax policy analyst for the Heritage Foundation:
"There are many problems with our tax code that are slowing economic growth and costing the nation jobs. There are so many issues that Congress needs to to prioritize and focus on the issues that are destroying the most jobs first," he said. ''Right now, the biggest destroyer of jobs in the tax code is our highest-in-the-world corporate income tax rate."
He said that Congress should be focusing on reducing that rate before it turns its attention to any other problem area of the tax code.
Kaiser: Foreign companies opening up shop in the U.S. versus other countries? "If taxes is the only factor, the United States might not be high on the list."
Differences between financing business activities through equity versus debt: "You go out in the financial markets, you can raise equity capital .... there's alwas been a bias in favor of debt." He noted dividends are not deductible to corporations, but are taxable to the recipient. "The corporation has already paid 35 percent, why should individuals pay another 35 percent to put it in their pockets?"
"'We talk about the Internal Revenue Code is broken, how do we fix it?" ....
"It just makes me nervous when we start calling charitible contributions loopholes."
Laurence Keiser, CPA: "I think you all remember 1976 when Reagan ... promoted a legislation ... called the Act for Simplicity, Fairness and Growth, and then a lot of people realized you could never have all three."
"If you can deduct it from your adjusted gross income, its a loophole and we need to do something about that," he said.
Keiser said he "applauds" the audience for "trying to root out all evil and come to a tax bill we can all live with."
"As some of you know, we have a deficit and we're trying to find ways to eliminate the deficit. Keiser said there was a full page ad in the Wall Street Journal that said: We can't talk our way out of debt. The deficit is not just a tax situation; it's a spending situation."
Talking about pass-through entities: "All of those things end up on individual returns, those end up getting taxed at a 35 percent rate. If corporate rate drops to 26 percent... will people stay in S corporations, limited liability companies and pay 35 percent?" He advised all to measure the impact of that.
"We talk about 35 percent as if its high," but Kaiser said when he first got into the industry, the tax could be 70 percent on unearned income. "So we have provisions in the law to encourage the payout of dividends ... to get those funds back out to individuals."
Kim Dixon, Moderator:
"There is agreement the rates are too high," she said, which may be discouraging foreign business. She noted that there is disagreement over what tax loopholes should be eliminated. "What are the big tax breaks that need to be cut?"
NYSSCPA President Margaret A. Wood has taken the podium and is now opening the session.
"As many of you are aware, the U.S. has one of the highest combined corporate tax rates in the world. This is much-debated topic has been in the spotlight before and is more complex than either conservatives or progressives make it," she said.
She noted that "there are those who acknowledge that yes, the U.S. corporate tax rate is high but with corporate tax teams within U.S. corporations, the amount that corporations actually pay is reduced so much so that the average effective tax rate on corporate income is in line with or lower than other countries' rates."
Wood pointed out that in December, President Barack Obama appointed a fiscal commission to produce a report detailing what it thought corporate tax reform should look like.
The subject of corporate tax reform became a part of President Barack Obama’s State of the Union address on Jan. 25 when he called on both houses of Congress to “Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years -- without adding to our deficit. It can be done.”
But can it? Panelists will soon debate this question at the Society's eleventh Breakfast Briefing, as well as the myriad issues surrounding corporate taxation.
Reuters Washington correspondent Kim Dixon will moderate the free event. Panelists include:
* Laurence Keiser, CPA, JD, LL.M., a partner at Stern Keiser & Panken, LLP in New York City;
* Curtis Dubay, the senior tax policy analyst for the Heritage Foundation;
* Daniel N. Shaviro, JD, the Wayne Perry Professor of Taxation at NYU’s Law School; and
* Peter Merrill, Ph.D., director of national economics and statistics for PricewaterhouseCoopers.
In an earlier interview with a Trusted Professional reporter, Panelist Merrill that the president’s speech appeared to put corporate tax reform ahead of broader tax reform involving individual tax rules, which had been recommended by his National Commission on Fiscal Responsibility and Reform.
“I think the immediate issue is now corporate tax reform,” he said. “Right now the question is whether or not it is possible to more narrowly focus on corporate income tax reform within the time frame of this year or early next year.”
Merrill noted that no tax reform plan has yet been proffered by the administration, resulting in speculation by analysts and the media as to what such a plan would entail.
Panelist and NYSSCPA member Keiser pointed out in a separate interview that over the years, other countries have lowered their corporate tax rates, “but the U.S. has not, so I think the proposal will be -- although I haven’t seen anything concrete yet -- to cut out some of the special breaks that corporations get, which will increase the amount of income subject to the tax rate,” he said. “Then, lower the tax rate to make the U.S. more competitive with some of the other countries out there.”
Obama said in his speech that he did not want corporate tax reform to add to the growing deficit. Merrill said “that means it would be revenue-neutral and that the corporate tax reduction would need to be offset by revenue-increasing measures elsewhere -- more specifically, in the business sector.”
Those attending the briefing, either in person or via live webcast, “will get a sense of how corporate taxes fit into the overall tax picture and what it does for revenue,” Keiser said, adding that “There will be multiple different philosophies and perspectives at the event, and for that reason, it will be noteworthy and different.”