Lost in all the hoopla over the Treasury’s new inversion policies was the accompanying update to their corporate tax reform outline. You can read the whole 30-page document here, but the bottom line is that not much has changed.
The plan still treats the pass-through community as second-class citizens by broadening the tax base for all businesses while only reducing rates for those organized as C corporations. As a result, successful pass-through businesses would be subject to 45 percent top rates on a broader base of income – a double whammy coming just three years after the Fiscal Cliff hiked their tax rates.
That’s simply a non-starter with Congress. From Politico:
McConnell also said he’s not interested in corporate-only tax reform, noting “most American businesses are not corporations” and lawmakers are not going to “carve out one section of American business and give them breaks and leave the others with very high rates.”
The plan also makes clear just how far apart the Administration and Congress are on tax policy.
The Ways and Means Committee continues to work on an international reform package that, by all accounts, includes an innovation box as the sweetener to help offset some of the new enforcement provisions. Meanwhile, the Administration spends two pages explaining why innovation boxes are a bad idea.
Finance Committee Chair Orrin Hatch (R-UT) continues to refine his plan to integrate the corporate and individual tax codes – something more than 100 national business groups have argued is an essential component of tax reform. Meanwhile, the Administration stands by their budget plan to increase shareholder taxes instead. (Exactly how combining lower corporate rates and sharply higher shareholder taxes helps to improve business taxation or encourage more investment here in the United States is not discussed in the Administration’s outline or anywhere else. It’s simply incoherent.)
And finally, while the majority in Congress stands uniformly opposed to raising taxes, the Administration’s plan explicitly calls for at least two significant tax hikes – a one-time 14 percent assessment on un-repatriated profits that would pay for new infrastructure spending, and a retroactive tax hike to offset to last year’s extender package. As Politico notes:
The Obama administration now wants to pay for that giant tax deal approved in December. After agreeing to stick the bill’s $680 billion cost onto the deficit, the administration now wants business tax reform to cover that cost. “Reforming the business tax system must be done in a fiscally responsible manner, including paying for December’s business tax cuts,” the administration said in an update of its business tax reform framework.
Most observers doubt there’s any chance for meaningful tax policy this year. The net result of this framework is to make that more clear.
Corporate Tax Base v. Business Tax Base
As noted above, there’s lots to dissect in the Treasury update, but you need not go further than the first paragraph to find something offensive. When it comes to the business community, it is obvious this Administration is focused only on large corporations.
America’s system of business taxation is in need of reform. The United States has a relatively narrow corporate tax base compared to other countries—a tax base reduced by loopholes, tax expenditures, and tax planning.
But the US doesn’t have a corporate tax base – it has a business tax base that includes both corporations and pass-through businesses. The good news here is that the US business tax base is large and growing.
According to the Tax Foundation, the business tax base made up 9 percent of US income prior to the 1986 Tax Reform Act, but makes up 11 percent today. That’s bigger. True, the corporate tax base has declined from 8 percent of US income in 1986 to 5 percent today, but the growth of the pass-through business community during that same time from just one percent to 6 percent has more than offset that decline.
So corporate-only tax reform advocates like the Administration are fond of pointing out that the corporate tax base has eroded over the past three decades. What they never point out, however, is that the business tax base – including both corporations and pass-through businesses – has grown significantly since the 1986 Tax Reform Act.
That’s a good news story that every tax writer in DC needs to learn.