Tax News

CCH (cch.taxgroup.com) reports:

American corporations are willing to trade tax preferences for a lower corporate rate, business executives told Treasury Secretary Henry M. Paulson, Jr. on July 26. While businesses may be eager for a corporate tax cut, many lawmakers are not, Alan Greenspan, former Federal Reserve Board chairman, cautioned. The businesses leaders and Greenspan spoke at the U.S. Business Tax Competitiveness Conference, a one-day conference sponsored by the Treasury Department in Washington, D.C.
Second Highest
The combined U.S. federal-state corporate tax rate is currently 39 percent. It is the second highest in the industrialized world after Japan at 40 percent.
"The current business tax system is not optimal," Paulson said. While progress has been made in some areas, such as lowering individual marginal tax rates and reducing the tax on dividends, "it is time for a comprehensive look at our system for taxing business."
Many of the business provisions in the Tax Code were enacted nearly 50 years ago. "Subpart F dates from 1962, when the U.S. was the dominant manufacturing country in the world," Treasury Assistant Secretary For Tax Policy Eric Solomon noted. "Today, we are very much a service economy."
Preferences
"We would trade preferences like the research and development tax credit in a minute for a lower corporate tax rate," Safra Catz, president and CEO of the Oracle Corporation, said. Her comments were echoed by other business leaders, including Jim Owens, president and CEO of Caterpillar, Inc. Owens said that his company spends $40 million a year on tax planning and filing globally, which he called a "waste of resources."
According to the Treasury Department, eliminating all preferences would raise $5 billion over a 10-year period, assuming the same statutory tax rates as the current system. If the revenue from tax preferences were used to lower the corporate tax rate, the rate could be lowered from 35 percent to 27 percent while producing approximately the same revenue.
CCH Comment . Twenty-seven percent is the average corporate tax rate of member countries of the European Union, Scott Hodge, president of the Tax Foundation, told CCH. The average rate for member countries of the Organisation for Economic Co-Operation and Development (OECD) is slightly higher, at 31 percent.
Although Catz, Owens and other business leaders at the conference were enthusiastic about giving up preferences for a lower corporate tax rate, the National Association of Manufacturers (NAM) called for enhancing one preference. "When the research and development credit was created in 1981, the U.S. had one of the strongest credits in the world. Today, the U.S. has fallen further behind and, among our major trading partners, now provides one of the weakest research and development incentives," NAM said in a statement released before the start of the conference. The Financial Services Forum recommended extending or making permanent the active financing exception for Subpart F of the Tax Code in a July 25 letter to Paulson.
Globalization
Worldwide corporate tax rates play an important role in deciding where to invest, Nanci Palminterre, vice president Finance and Enterprise Services, Intel Corporation, said. "There are many places that can provide us with the infrastructure and workforce we need." Countries are aggressively competing for investments and offering incentives, such as Malaysia's 10-year tax holiday, she noted.
"Anyone who has been to Ireland knows what a difference a lower corporate tax rate makes," Catz said. Ireland's corporate tax rate of 12.5 percent is among the lowest in the industrialized world. Multi-national companies have flocked to Ireland since the country lowered its corporate tax rate.
CCH Comment . Investment also grew in some eastern European countries after they lowered their corporate tax rates, Hodge told CCH. "U.S. investment in those countries increased significantly."
Political Resistance
"Anything that is anti-competitive, which our corporate tax rate is, strikes me as something we should be concerned about," Greenspan said. However, lowering the corporate tax rate will run into political resistance, he predicted. He also expressed concern about protectionist policies gaining popularity.
No Specific Proposals
Paulson did not make any specific proposals, repeatedly emphasizing that the conference was the start of a discussion about the nation's business tax system and competitiveness in the global economy. He briefly mentioned three ideas: lowering the corporate tax rate and eliminating preferences; moving to a territorial regime; or taxing capital differently.
"The next step will be to put together what we heard today and identify themes," Solomon said. There is no specific deadline for developing any proposals, Solomon added.
By George L. Yaksick, Jr., CCH News Staff
Treasury Department News Release, TDNR HP-507
Treasury Department News Release, TDNR HP-508
Financial Services Forum Letter to Paulson
NAM Release: Lower Corporate Tax Rates and a Strengthened R&amp Incentive Are Critical