Thursday, July 26, 2007

Rarely will you hear me advocating lower corporate tax rates, but...

Jeanne Sahadi, writing for CNN Money, notes that corporations would rather take all the complexity (the credits and deductions) out of the tax code, and get a lower tax rate for everyone. With large corporations, the fairness issue behind progressive taxation applies less. CEOs note that they are spending immense amounts of time and money handling an extremely complicated tax code. Perhaps if the complexity were taken out, they would save money, and end up paying the same amount of taxes on a lower tax code but higher productivity.

Take your tax breaks and mind-boggling incentives - give us a low rate.

That was the message Thursday from top CEOs and former Federal Reserve chairman Alan Greenspan at a conference convened by Treasury Secretary Henry Paulson, former chairman and CEO of Goldman Sachs.

The leaders of Oracle, Fed Ex and Caterpillar unanimously agreed that U.S. competitiveness, U.S. shareholders and U.S. workers would be much better off if U.S. corporate tax rates were lower, and a lot of deductions, credits and other preferences (e.g., the research and development credit) were eliminated.

Greenspan noted that the Tax Reform Act of 1986 lowered tax rates and broadened the base of taxable income by eliminating various tax shelters. "We've almost fully unraveled the benefits of that," said Greenspan. "We ought to resurrect [the principles of that]."

When Paulson asked panelists whether they'd like to see the corporate tax rate lowered from 35 percent - the top rate today - to 27 percent along with the elimination of preferences such as the research and development credit, Safra Catz, president and CFO of Oracle Corporation, said without hesitation. "I'd trade it in a minute for a simpler, lower rate."

Catz said it's not unusual for a CEO to sit through a six-hour tax briefing "so complex your head could blow completely off." Companies, she said, would save an enormous amount of money if they didn't have to worry so much about lowering their tax bill.

James Owens, chairman and CEO of Caterpillar, said his company spends some $40 million a year on tax planning. "It's a big waste."

"We have a very uneven landscape in business taxation," William Gale, co-director of the Urban-Brookings Tax Policy Center, noting that different types of business activities can be taxed at different rates, which can encourage investments for tax purposes rather than economic growth purposes.

The corporate leaders also noted that from their perspective ultimately American workers, consumers and shareholders bear the greatest part of the cost of higher corporate rates and a complex tax system because it ultimately can raise product prices and lower investment and growth in the United States.

The majority of economically developed countries have lower corporate tax rates than the United States, but they don't necessarily have as many tax breaks. Those breaks can greatly lower the amount U.S. companies actually pay.

In addition, many other countries allow their multinationals to pay the corporate tax of the countries where the subsidiaries make their money. By contrast, U.S.-based multinationals usually must pay at least a portion of the tax owed on their subsidiaries' income at the U.S. corporate tax rate.

The net effect, corporate leaders say, is higher product costs, an uneven playing field for U.S. companies internationally and, Caterpillar's Owens said, "It discourages companies from bringing capital back to the United States."

Indeed, Catz said, "Now it's irrational and inappropriate for us to bring some capital back."

Frederick Smith, president and CEO of FedEx, noted that if tax rates were lower his company would, for instance, be more inclined to boost investment in the manufacturing of trucks and planes.

Two years ago, President Bush's Tax Reform Panel presented a report calling for an overhaul of both the individual and corporate income tax codes, but it has received very little attention from the White House or lawmakers since.

In the meantime, Congress is facing three key tax debates cuyrrently:

How to reform the Alternative Minimum Tax;
Whether to reform how private partnerships that go public are taxed; and
Whether a portion of private equity and hedge fund managers' compensation should be taxed as individual income or at the lower capital gains rates.

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