Mike & Co. —
It’s April, tax time, and tax reform is in the air in DC again this spring as Senate Finance and House Ways and Means both hold hearings on the topic this week. Additionally, the Joint Committee on Taxation released a comprehensive background report on corporate income tax (CIT) reform Friday which outlines and analyzes the principle reform proposals from Treasury and the Hill.
The JCT report raises some questions underlying the debate such as: is the business side of the tax functioning as intended in fiscal terms? The basic structure of the CIT has not changed in decades. Yet the reports shows the share of revenue it contributes has fallen over the last 60-plus years to the point where individuals are paying over $300 billion a year more in 2017 dollars to make up the difference.
More on this and the proposals that will be considered this week below.
Proposals on the Table
Senate Finance will hold a full committee hearing tomorrow on “navigating business tax reform.” Ranking member Sen. Wyden is also rumored to be releasing a proposal tomorrow that will rewrite corporate depreciation schedules for the first time since 1986.
Sen. Wyden’s proposal would implement changes to a relatively small component of the business tax code, but it’s one which gets to the heart of the matter – it change would slow down and “simplify” deductions, which likely means that there will be one or just a few standard rates of depreciation, a benefit for manufacturing firms.
Meanwhile, despite the broad-based reform efforts toward the end of the last Congress, the bold talk has remained just that: talk. One option was put forth by Rep. Bob Goodlatte, chair of the House Judiciary committee. His Tax Code Termination Act would abolish the entire tax code, save for payroll taxes, on December 31, 2019. Goodlatte says that a hard deadline would help to “focus the mind” of lawmakers on fixing the issue of an unworkable tax code. The bill boasts 130 cosponsors, only one of which is a Democrat, and like faces an uphill battle even within its own party. It will be difficult to get support for such a radical proposal, especially considering how little momentum has been built for comprehensive reform so far.
The JCT’s newest report covers four or the more serious and comprehensive CIT reform proposals, as follows:
- Repeal a number of corporate tax expenditures, including credits for energy companies and repealing methods of accounting for inventories
- Allowing the repatriation of foreign profits at a special tax rate of 14 percent with a rate of 19 percent thereafter for all foreign-earned profits
- Reducing the maximum corporate tax rate from 35 percent to 28 percent
- Repealing the corporate AMT
Reforms Maintaining Current Income Tax Structure
- See: Dave Camp and Max Baucus plans for broadening the base in order to lower rates
- Change the manner in which property depreciation is calculated by businesses
- Repeal of certain tax credits to create a more level tax field
- Provide relief for certain types of income, particularly for income derived from intellectual property or for passthroughs by harmonizing the top individual and corporate income rates
Reforms Altering the Income Tax Structure — Proposals that consider equalizing the tax treatment on debt vs. equity by repealing the interest payment deduction for corporations:
- Allow for corporations to take a deduction on the payment of dividends in order to prevent the double-taxation of income
- Abolish the corporate income tax entirely in order to prevent double-taxation of income, and rely on the use of individual income taxes from dividend payments
Consumption Tax — These have been particularly popular in the Republican race, with Rubio and Cruz both promoting plans that use some variation of the below:
- Institute a Value-Added Tax (VAT) to replace the corporate income tax or sales tax
- Institute a cash-flow tax, this is often taxed at the business level and would prohibit the taxation of dividends and capital gains
Impact and Rationale
The share of federal tax revenue that comes from the CIT has dropped from a high of 39.8 percent in 1943 to just 10.8 percent in 2015 (which was actually the highest it had been since 2008). The remainder of federal tax revenue comes from a combination of payroll taxes (about 30 percent) and excise taxes (under 10 percent). Both of these are regressive and weighted toward consumers or individual earners, meaning that the real share of tax revenue from individuals is higher than indicated through the income tax — but it has become more over the decades.
To put this into hard numbers, in 2014 individual taxpayers foot a bill of roughly $1.03 trillion in income taxes alone, compared to a corporate income tax payment of $138 billion. If the relative tax burden had stayed the same between 1943 and today, businesses would have paid $471 billion. Accordingly, individuals, including S and C corp filers, solo proprietors, and most small business owners and farmers are paying $333 billion more per year to make up the shortfall and tax nonpayment by corporations.
The slowly shifting tax burden in the U.S. away from the CIT represents a regressive and significant form of transfer payment to corporations that has been largely overlooked or at least unremarked on. The impact of this shift on ordinary citizens, small business owners, and millions of others cannot be understated and neither can the importance of politicians at least sparking discussion about it.