Recalling one of our first blawg posts, the topic of tax reform could be described in much the same terms as the codification of economic substance (prior to its codification, anyway): “a cousin of Bigfoot and the Loch Ness Monster – often spotted, but never confirmed.” Reform commissions come and go with nearly every presidential administration, and the current one is no exception.
The National Commission on Fiscal Responsibility and Reform has released its much-anticipated report proposing reforms intended to closing the yawning federal budget deficit. The report, titled “The Moment of Truth,” a copy of which is available here, makes a variety of proposals, including a number of reforms to individual and corporate tax provisions.
The reform proposals for the corporate income tax are, according to the report, driven by a concern about the competitiveness of American businesses:
The corporate income tax, meanwhile, hurts America’s ability to compete. On the one hand, statutory rates in the U.S. are significantly higher than the average for industrialized countries (even as revenue collection is low), and our method of taxing foreign income is outside the norm. The U.S. is one of the only industrialized countries with a hybrid system of taxing active foreign-source income. The current system puts U.S. corporations at a competitive disadvantage against their foreign competitors. A territorial tax system should be adopted to help put the U.S. system in line with other countries, leveling the playing field.
In furtherance of its goals, the Commission proposes the following changes:
- Establish single corporate tax rate between 23 percent and 29 percent. Corporate tax reform should replace the multiple brackets (the top being 35 percent), with a single bracket as low as 23 percent and no higher than 29 percent.
- Eliminate all tax expenditures for businesses. Corporate tax reform should eliminate special subsidies for different industries. By eliminating business tax expenditures – currently more than 75 – the corporate tax rate can be significantly reduced while contributing to deficit reduction. A lower overall tax rate will improve American business competitiveness. Abolishing special subsidies will also create an even playing field for all businesses instead of artificially picking winners and losers.
- Move to a competitive territorial tax system. To bring the U.S. system more in line with our international trading partners’, we recommend changing the way we tax foreign-source income by moving to a territorial system. Under such a system, income earned by foreign subsidiaries and branch operations (e.g., a foreign-owned company with a subsidiary operating in the United States) is exempt from their country’s domestic corporate income tax. Therefore, under a territorial system, most or all of the foreign profits are not subject to domestic tax. The taxation of passive foreign-source income would not change. (It would continue to be taxed currently.)
The Commission offered the following chart as an illustration of how the corporate tax provisions would look under its proposal (click on the image for a larger view):
We won’t presume to handicap the odds of some or all of the Commission’s proposals being implemented. Nevertheless, growing concerns about the size of the federal government’s annual deficit, coupled a still-stagnant economy, seem to be pushing the discussion about tax reform from a question of “if” to questions of “when and how”.