Superficial similarity between the Democratic and republican proposals to revamp corporate tax has some predicting a deal to reform the code next year, if not this year. Added to that are the voices on both sides of the aisle calling for lower rates to make u.s. corporations more competitive with their overseascounterparts.

As of April 1, the U.S. tax rate became the highest in the world as a result of Japan lowering its rate by five percentage points. At least partially as a result of its former status as "highest tax rate in the world," Japan lost 39 Fortune Global 500 company headquarters in the last decade. The U.S. did worse, losing 46 Fortune Global 500 company HQs in the same span of time.

"Leading the world with the highest corporate tax rate and an overly complicated tax code is not a distinction we wish to have," said Elaine Kamarck, a lecturer in public policy at the Harvard Kennedy School of Government, a former advisor to President Bill Clinton and Vice President Al Gore, and the Democratic co-chair of the Reforming America's Taxes Equitably Coalition. "Reforming the corporate tax code has wide bipartisan support and the momentum is there to get the job done and help create jobs in this country."

However, Kamarck said that it is unlikely that the corporate rate can be lowered separate from a wider tax reform. "While it doesn't bring in as much revenue as before, it still brings in a fair chunk, 7 to 13 percent of total revenue," she noted. "But it's still a big chunk, and we're in an era where people are worried about deficits, so it's hard to imagine a cut that's not almost revenue neutral."

While she agrees that 2013 is more likely for any kind of legislation, she believes that it might be possible to pass something this year. "There is a growing consensus in Washington that we will have tax reform on the agenda in 2013," she said. "But we actually think that there is a possibility we could do the corporate tax reform in 2012."

There are two reasons for this, she said: "First, the two parties are actually very close on the outlines of the bill. The White House put out a proposal for a 28 percent rate, paid for by closing various loopholes, and the Republicans put out their proposal for a 25 percent rate, paid for by closing various loopholes. You can see the outlines of a deal. The second reason is that Congress passed with nary a whisper the extension of the payroll deduction and unemployment compensation. We think that politicians are feeling the anger of the people in not getting something done, and this is something that's viewed as a deliverable to voters who are unhappy with the gridlock in Washington."

Although critics have pointed out that many corporations would pay more in tax under the president's reform proposal because of the elimination of various tax breaks, Kamarck indicated that a more simplified tax system is still more attractive. "The argument goes beyond the bottom line of the tax rate, it goes to a sense that simplicity and predictability are good for business," she said. "Complex tax codes of industry-specific provisions are bad not only for individual business but for the overall economy. This view is shared by both sides of the aisle, which is why we feel this is a pretty logical first step into what we see as a larger step into overall tax reform."



There's a good opportunity to pass real reform, agreed Mark Sieke, of counsel at the Los Angeles office of Mitchell Silberberg & Knupp. "If you put aside the notion of an election year issue but look at it as reform, there's a better-than-even chance that something will get enacted. There's a question as to whether, on net, tax revenue would go up or down under the administration proposal," he said, since the disappearance of deductions and credits would counteract any effect of the lower rate.

"In addition to revenue-neutrality, there's a push for entity-neutrality," he observed. Although the administration framework doesn't describe it in detail, it advances the notion of "parity" between the taxation of corporations and non-corporate entities. "Sometimes the fact that a partnership is not a taxable entity gets lumped in with C corporations that don't happen to pay much in the way of corporate tax," he observed. "But there are reasons for passthroughs. To the extent there is federal legislation to tax a passthrough at the entity level, it would be a strong break with tradition and the nature of conducting business through a partnership form."

Rep. Dave Camp, chairman of the Ways and Means Committee, has likewise called for neutrality between business and individual tax rates, noting that the difference between individual and corporate tax rates has an important effect on a business and how it is organized. "For example, if individual income tax rates are substantially higher than corporate income tax rates, there is a clear incentive for taxpayers to organize business activity in corporate form," he said.

"There is little doubt that economic distortions can be created by a tax code that tilts too much in any one direction," he said. "Naturally, one of the most effective ways to prevent that distortion is to create a neutral tax code in which the individual tax rates are similar to corporate rates."



Despite the closeness of the two sides and the bipartisan acknowledgment that lower rates and overall reform are necessary, most observers don't foresee a reform bill passing this year.

"I don't expect there to be an actual legislative effort on tax reform in 2012, particularly given the pending presidential and congressional elections," said Marc Gerson, former majority tax counsel to the House Committee on Ways and Means. "The recent payroll tax legislation suggests that it is extremely difficult to move even modest pieces of tax legislation through the system, so the thought of tackling major tax reform in the current political environment is practically a non-starter."

"That being said, I do think this year will involve a lot of productive discussion on tax reform as the tax-writing committees continue their respective series of hearings on tax reform," Gerson continued. "There are a number of substantive tax reform proposals, including Ways and Means Chairman Camp's international tax reform discussion draft and Senator Mike Enzi's tax reform bill. Comments on these by interested parties will certainly shape the tax reform effort in the future. And the administration's business tax reform framework, although lacking legislative language and specific details, may also further the discussion."

Political considerations aside, tax reform is complicated, lengthy, and even under the best of circumstances may take a number of years, Gerson indicated. "Before a true tax reform effort can get underway, Congress and the administration will have to agree on a number of threshold issues, such as the scope of reform and its desired budgetary impact, and such a meeting of the minds has not occurred yet," he said. "Further, a simple comparison of the Camp discussion draft and the framework released by the administration demonstrates how far apart the parties are on issues such as the targeted top corporate tax rate and how the international tax system should be reformed."



The lower tax rates proposed by the administration plan and the Republican plan, while a step in the right direction, won't do much to tilt the playing field for border-area businesses that can take advantage of the much lower Canadian tax rate, according to Dr. Nathan Oestreich, professor of accounting at San Diego State University. "So, Canada cuts its corporate tax rate to 15 percent, lower for small business," he said. "The U.S. proposes 28 percent, one assumes to remain competitive. Where will border-based business activity reside? O Canada!"

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