Senate panel mulls business tax reform
The Senate Finance Committee held a hearing Tuesday to discuss reforming the business tax code and heard from a group of panelists, including a representative of the American Institute of CPAs.
“Fair and equitable tax reform will drive economic growth and enhance the competitiveness of all types of American businesses not only in the U.S., but also abroad,” said Troy K. Lewis, former chair of the AICPA’s Tax Executive Committee and now a professor at Brigham Young University. “We need a tax system that is fair, stimulates economic growth, has minimal compliance costs and allows taxpayers to understand their tax obligations.”
Lewis said the AICPA opposes any new limitations on the use of the cash method of accounting. “The cash method is simpler in application, has fewer compliance costs, and does not require taxpayers to pay tax before receiving their income,” he said in his written statement. “Forcing businesses to switch to the accrual method, unnecessarily discourages business growth, increases compliance costs, and imposes financial hardship on cash-strapped businesses.”
Lewis said tax relief should not simply provide a rate reduction for C corporations only. “Excluding professional service firms reflects a view of the service industry that does not represent the current global environment,” he said. “In today’s economy, professional service firms are increasingly competing on an international level with businesses organized as corporations. They also require a significant investment, and rely on the contribution of employees to generate a substantial portion of the revenue. Artificially limiting the use of a lower business rate, regardless of industry, would penalize a business for operating as a pass-through entity.”
Senate Finance Committee chairman Orrin Hatch, R-Utah, called for lowering tax rates on corporations as well as pass-through businesses like partnerships. “In tax reform, we need to address all of these problems and distortions, and many others as well,” he said in his opening statement. “In particular, we need to lower the corporate tax rate to relieve the burdens the tax imposes on American workers, who, according to many economists, bear a significant part of the corporate tax. We also need to reduce the burden on pass-through businesses, whose earnings are reported and taxed on individual tax returns. These types of businesses include sole proprietorships, limited liability companies, partnerships, and S corporations. And, we need to fix our international tax system so that American businesses can compete in the global marketplace without facing significant disadvantages simply because they are headquartered in the United States.”
Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, expressed alarm about the latest effort to rush through a repeal and replacement of the Affordable Care Act before the end of the month in the Senate. He then turned his attention to the closed-door negotiations between the Trump administration and congressional Republicans over tax reform.
“The details leaking out of the ‘Big Six’ meetings paint a clear picture of an unprecedented tax giveaway for the most fortunate and biggest corporations. The centerpiece could very well be a 2 trillion dollar loophole having to do with what’s called pass-through status,” said Wyden. “Pass-through status is supposed to be about helping small businesses, and there’s no question that small businesses—who fuel local economies and hire the most workers—need a boost in tax reform. But any tax change that allows tax cheats to abuse pass-through status by ‘self-declaring’ to avoid paying their fair share and dodge Social Security taxes would be worse than what’s on the books today. The day the pass-through loophole becomes law would be Christmas morning for tax cheats. It would make a mockery of the Trump pledge that, quote, ‘the rich will not be gaining at all with this plan.’ And that’s just one element of what’s on offer. Bottom line, it’s time for the Congress to take the lies out of the corporate tax rate in America. Many of the biggest corporations in the country employ armies of lawyers and accountants who know all the tax tricks. They winnow their tax rates down to the low teens, single digits, even zero. So the Congress cannot pair a big corporate rate cut with a plan to enshrine a vast array of loopholes that let corporations off the hook for paying their fair share. That’s a surefire way of heaping a heavier burden onto the middle class.”
Scott Hodge, president of the Tax Foundation, testified about corporate tax reform. He called for full expensing of capital investments, cutting the corporate tax rate to a more globally competitive level such as 20 percent, moving to a territorial tax system, and making the policies permanent. “In our view, cutting the corporate tax rate and moving to a territorial system are essential for restoring U.S. competitiveness and reducing the incentive for profit-shifting and corporate inversions,” he said. “Expensing, we believe, is key to reducing the cost of capital in order to revitalize U.S. capital investment which, in turn, will boost productivity and wages.”
Donald Marron, an institute fellow at the Urban Institute and the Urban-Brookings Tax Policy Center, argued that corporate tax cuts would mainly benefit people with high incomes such as shareholders and that taxing pass-through business income at a preferential rate would create new opportunities for tax avoidance.
“When taxpayers see an opportunity to switch from a high tax rate to a lower one, they often take it,” Marron said in his written testimony. “This is especially true when they can make the shift with a mere paper transaction, not a real change in economic behavior. Prominent examples include Kansas’s experiment with eliminating taxes on pass-through income, S corporations’ profits exemption from Medicare payroll taxes, and preferential rates for long-term capital gains. Taxpayers will react the same way if pass-through business income gets preferential treatment. Legislative and regulatory measures to limit tax avoidance will introduce new complexities, create arbitrary distinctions, and impose new administrative burdens.”
Jeffrey DeBoer, president and CEO of the Real Estate Roundtable, called for tax reform on real estate businesses, while also cautioning against a “sugar high” of temporary growth. “The real estate industry agrees that tax simplification and reform is needed and long overdue,” he said. “We should restructure our nation’s tax laws to unleash entrepreneurship, capital formation, and job creation. At the same time, Congress should undertake comprehensive tax reform with caution, given the potential for tremendous economic dislocation. Tax policy changes that affect the owners, developers, investors and financiers of commercial real estate will have a significant impact on the U.S. economy, potentially in unforeseen ways. A broad-based acceleration of economic growth through tax reform would boost real estate construction and development and spur job creation. However, Congress should be wary of changes that result in short-term, artificial stimulus and a burst of real estate investment that is ultimately unsustainable and counterproductive. Real estate investment should be demand driven, not tax driven. In short, we should avoid policies that create a ‘sugar high’ that is fleeting and potentially damaging to our future economic health.”