The deficit reduction panel called for tax reform, as did the National Taxpayer Advocate and the House Ways and Means Committee. Now, President Obama has added his voice to the mix with his State of the Union address.
While the details of the president’s plan will become clearer in mid-February when he submits the administration’s budget proposal, he stated that it needed to be “revenue neutral.”
In other words, he did not endorse a net corporate tax reduction, since that, at least theoretically, would add to the deficit. "Theoretically," because the static method of scoring legislative proposals currently in use doesn’t take into account the increase in economic activity generated by a more favorable tax landscape, which could lead to greater profits and increased revenue from the taxation of those profits.
“Any reduction in the corporate rate will need to be funded by the repeal of credits and deductions, which will create winners and losers,” said Marc Gerson, former majority tax counsel to the House Ways and Means Committee.
“If there is a revenue-neutral corporate tax reform effort, any deduction in the corporate tax rate will be funded by base broadening, the removal of deductions and credits,” he added. “The reason it creates winners and losers is because companies have very different tax profiles. The removal of a particular credit, for example, would have very different impacts on different companies. Some taxpayers utilize a specific credit to a great degree, while others don’t use it at all. The question is, what impact will it have on different taxpayers when it is removed?”
Gerson, a tax partner at Washington-based Miller & Chevalier, noted the continuing interest in tax reform over the past year. “Last year, a number of different reports came out,” he said. “The Volcker Commission, the Wyden-Gregg bill, the Senate Finance Committee hearings, and the deficit reduction commission report all weighed in on tax reform.”
Added to this is the competitive pressure to lower the corporate tax rate, currently the second highest in the world, as well as solving the annual extenders problem. “So much of tax legislation is dedicated to extending things on a temporary basis,” Gerson noted. “These include the business extenders, the Bush tax cuts, and the AMT patch. So, over the last couple of years, there has been a recognition that there needs to be a fundamental tax reform effort. And tax reform has been one of the mechanisms that the president has used to reach out to the corporate community this year."
The next sign of the likelihood of tax reform will be the priority that the administration places on it, according to Gerson.
“An indicator will be if the president uses the budget proposal to prioritize or proactively puts forth his own tax reform in the context of the budget,” he said “The big picture is that there is strong bipartisan interest in reforming the Tax Code. The question is, does Congress take it upon itself, and does the administration proactively push the debate forward with its own proposal?”
“It’s too early to tell who the winners and losers will be. There are a large number of proposals out there,” he said. “You can start out with the notion that there will be a reduction in rates, and a removal of deductions and credits, but it’s hard to tell exactly who wins and who loses.”
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