President Barack Obama unveiled his plan for sweeping corporate tax reform in a 23-page initiative released this week at a briefing held by Treasury Secretary Timothy Geithner. His election year proposals represent the largest overhaul of the business tax codes since Ronald Reagan pushed the maximum tax rate to 35 percent back in 1986. In a statement released by the White House, the President said, "Our current corporate tax system is outdated, unfair, and inefficient. It provides tax breaks for moving jobs and profits overseas and hits companies that choose to stay in America with one of the highest tax rates in the world. "
"It is unnecessarily complicated and forces America's small businesses to spend countless hours and dollars filing their taxes. It's not right, and it needs to change," he said.
Sparse Reaction to Scant Details
"We are only at the starting point of corporate tax reform, and the road is a long one," observed Tax Analysts editor and former U.S. Treasury staff member Martin Sullivan. Business groups reacted with cautious optimism when praising the measure to slash the corporate tax rate from 35 percent to 28 percent. Last week, Republican frontrunner Mitt Romney called for a maximum 25% tax rate while GOP contender Rick Santorum suggested 17.5% and Newt Gingrich favored 12.5%. While the top US corporate rate of 35% ranks second in the world after Japan, few American companies actually pay this rate after tax breaks and revenue shifting to jurisdictions with lower rates.
The nation’s business leaders expressed support for other measures designed to plug accounting loopholes, increase transparency, and reduce the document burden for small businesses. However, American manufacturers will benefit the most should the Congress let the President have it his way. In addition to cutting the top corporate tax rate, this package increases the level of current domestic activities from 3% to 10.7%. Also, businesses involved in renewable energy technologies, like the wind and solar industries, will get a boost from provisions recasting existing temporary incentives as permanent tax credits.
Major Changes Proposed
The other prominent features of the Obama tax overhaul plan include:
* Granting businesses having less than 50 employees an Affordable Care Act health insurance credit that is now only available to firms having less than 25 employees.
* Doubling the amount small businesses are allowed to expense for company-related investments from $500,000 to $1 Million.
* Allowing new business to deduct $10,000 of their start up costs instead of the $5,000 currently permitted.
* Increasing the gross receipts amount that requires firms to use more complex accrual accounting procedures from the current $5M to $10M.
Simple is Better
The President’s plan acknowledges that the tax code places a burden on company resources and it points out this new approach to "Tax reform should make tax filing simpler for small businesses and entrepreneurs so that they can focus on growing their businesses rather than filling out tax returns." Small businesses have railed for decades against the costs and complexity of tax compliance. The Tax Foundation found the cost of complying with Federal income tax regulations had risen 206%, going from $79.7B in 1990 to $243.9B in 2004. The Tax Foundation also projected the cost to businesses would double again to $482.7B by 2015. Other studies focusing on 2004 reported about 10% of America’s small business spent nearly $5,000 and devoted nearly 500 hours to filing tax returns.
How Will it Affect Small Businesses?
Executives responsible for rapidly expanding companies place more importance on access to capital than on lower taxes. Owner and CEO Zalmi Duchman expressed his needs this way, "Cutting tax rates or changing that tax code is only important if you're making money and if your company is profitable, but if your company is a growing company, you don't really care. You care about saving things like payroll tax. This doesn't help fast-growing companies; it doesn't help us on the Inc. 5000. We just need capital. For me, that's the most important thing."
The President must still sell his latest tax reform proposals to an uncompromising Congress during a crucial election year. As the designated point man, Treasury Secretary Geithner must build bipartisan support in upcoming meetings scheduled with Republican Senator Orrin Hatch, currently the ranking member of the Finance Committee, and from the Democratic Chairman of the Armed Services Committee, Senator Carl Levin. Even if Secretary Geithner fails to achieve the necessary consensus, the President's initiative to revamp the country’s bloated tax laws is sure to remove corporate tax reform as a major campaign issue.