A majority of business leaders believe tax reform should be separated from reforms to government entitlement programs and deficit reduction, according to a new poll.

The survey, by KPMG’s Tax Governance Institute, found that just over half (52 percent) of the respondents to the survey said they thought tax reform should be separable from deficit reduction and reforms to entitlement programs, such as Medicare, Medicaid and Social Security, while 27 percent felt it shouldn’t and 18 percent weren’t sure.

In addition, 50 percent of the survey respondents said tax reform needs to be comprehensive, while 31 percent prefer for individual and corporate tax reform to move on separate paths.

The survey also found that over 40 percent of the 840 respondents feel Congress should expand the reach of the corporate tax to include “pass-through” entities, such as partnerships, S-Corporations and limited liability companies. On the other hand, 31 percent said Congress shouldn’t expand the corporate tax to include “pass-throughs” and 30 percent were not sure. 

“Respondents clearly indicate that the time for comprehensive tax reform has come,” said Hank Gutman, principal and director of KPMG’s Tax Governance Institute and a former chief of staff of the U.S. Congressional Joint Committee on Taxation. “Although the need to change the way in which business income is taxed is widely recognized, there is no consensus on the solution. Complicating the resolution is the fact that, according to the Treasury, as much as 70 percent of business income in the United States is earned by pass-through entities, such as partnerships, S-Corporations and limited liability companies, in which the income is not subject to corporate tax. Depending upon how it is done, eliminating business tax preferences to finance a corporate rate reduction may result in a tax increase on the owners of pass-through enterprises, and that poses a political problem. It also shows that business tax reform cannot be separated from consideration of individual tax issues.”

The results also revealed that if comprehensive tax reform efforts fall short in 2013, 50 percent of those polled believe that specific proposals in the recently issued “discussion draft” from House Ways and Means chairman Dave Camp, R-Mich., for reform of certain financial products could become part of a smaller tax reform bill (see House Republicans Propose Tax Reforms for Financial Products). In addition to the proposal’s impact on the financial services industry, it could have a significant effect on treasury departments at corporations and insurance companies. The proposals in the draft call for simplifying and making more uniform the rules of derivatives and making changes to the taxation of debt instruments,

In another key finding from the survey, 54 percent of respondents said they felt the proposals have a fair chance of being adopted into law. Only 5 percent felt they had an excellent chance and 13 percent said there was no chance they would be adopted. Twenty-eight percent were not sure.

When asked what they felt would be the biggest challenges that the discussion draft could face, 34 percent cited lobbying efforts from Wall Street and 31 percent cited congressional focus on the looming debt ceiling and spending cuts.

More than half of respondents (56 percent) are in favor of the proposals in the discussion draft from Camp. Thirteen percent said they were not in favor and 31 percent were not sure.

Survey respondents were split on whether they felt the proposal was too bold a step for revising the tax rules governing derivatives. Thirty-two percent said the proposal was too bold, 34 percent said it wasn’t and 34 percent said they weren’t sure. Camp also issued another discussion draft Tuesday on tax reforms for small businesses (see Ways and Chairman Camp Proposes Small Business Tax Reforms).

“Congressman Camp’s interesting proposal, which responds to the realities of the modern financial markets, is a signal that many items could be on the table when it comes to comprehensive tax reform,” Gutman noted.

The survey reflects the responses of members of the Tax Governance Institute—including board and audit committee members, CFOs and tax directors—who participated in a Feb. 1, 2013 webcast. A replay of the video webcast is available here.

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