Representatives from industry, government and the accounting profession called on Congress to reform the nation's business tax structure, warning that the current web of corporate tax incentives and penalties is pressuring companies to adopt inefficient practices.Tax Executives Institute International president David Bernard urged the Senate Finance Committee to abandon the current "patchwork of tax incentives and inducements" for businesses, and switch instead to a "simpler, more administrable code" that will promote sound tax policy. Rather than legislating business tax preferences in an effort to "pick winners and losers" in the marketplace, he recommended a broader tax base with lower rates for all businesses.

U.S. Comptroller General David Walker agreed, noting that an improved business tax system should feature greater transparency and "few tax preferences or complex provisions."

"Making business decisions based on tax considerations, rather than on the underlying economic benefits, results in channeling some investments into less productive activities," Walker told lawmakers. When that happens, he said, it "reduces the standard of living for all Americans."

Still tinkering ...

Congress, however, is showing no sign that it is willing to stop tinkering with the tax code in order to promote certain types of business activity and discourage others.

Although Finance Committee Chairman Charles Grassley, R-Iowa, acknowledged that tax code reform should "minimize tax-induced distortions to legitimate business decision-making," he was not ready to agree that non-revenue-related incentives should be ironed out of the system altogether.

"Some hard-core economists may disagree, but another objective of our business tax system should be to promote sensible non-tax policies," he said at the start of the hearings.

The committee's ranking Democrat, Montana Senator Max Baucus, seemed similarly reluctant to give up the practice. In his opening statement, Baucus voiced concerns that a number of already troubled U.S. industries may face even more problems under proposals from the President's Advisory Panel on Federal Tax Reform for the elimination of tax incentives and preferences for capital investments. "How would the loss of depreciation deductions on existing assets ... affect American businesses like Ford and GM?" Baucus asked.

Baucus' misgivings were prompted by the reform panel's proposed "Growth and Investment Tax Plan," which would eliminate business interest deductions but maximize expensing by allowing businesses to claim a 100 percent write-off for new capital investment.

Ernst & Young principal Thomas Neubig also expressed objections to the panel's plan for enhanced deductions for capital investment, calling it a consumption tax disguised as income tax reform. "One might have expected that this plan ... would have inspired a collective standing ovation from corporate finance and tax officers," he told the committee. "Instead, the response has been similar to the proverbial sound of 'one hand clapping.'"

Neubig, national director of E&Y's quantitative economics and statistics practice, attributed the "tepid response" to this plan to a clear preference among business taxpayers for lower corporate rates, rather than increased expensing. "Corporations already expense a large fraction of their capital investment," he told the committee. "A lower tax rate would benefit both their tangible and their intangible investments - a benefit not offered by the business cash-flow tax proposed by the president's panel."

Another accounting profession witness at the hearing, RSM McGladrey spokesman Jeff Johannesen, said that streamlining the business tax code is a particularly important goal for small and midsized companies. "We believe that complexity makes many tax incentives more beneficial to big business than to small and midsized organizations," he said.

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