A Look at Corporate Tax Reform

Most of you are well aware of the fact that I am a fan of corporate tax reform. I have even stated in various venues that I hope the president is successful in getting the top rate lowered. I am in good company as Rep. Dave Camp (R), Chairman of the House Ways & Means Committee, also welcomed the proposal.

In brief, the plan calls for the reduction of the top corporate tax rate from 35% to 28%, a number that the administration believes is in line with the international average. I favor a 25% rate as this would help make the US more attractive to foreign investment. It may provide an additional inducement to keep business here in the US or to re-shore operations that have gone offshore.

The president seeks to do this by offering a 20% tax credit on expenses for relocating back to the US. Let's not tinker; Mr. President, please just put the rate at 25% and provide a blanket inducement instead of selected benefits.

There is a provision to the tax plan that will cost US multinationals. Profits on foreign operations would be taxable when those profits are earned, not when they are repatriated. Thus, global profits are taxed at an adjusted minimum corporate tax rate. This works well for Washington, but it diminishes the cash position, and thus competitiveness, of US multinationals.

The plan would seem to punish multinationals for doing business out of the US, but the economic reality is that foreign operations are often necessary and healthy for those companies, investors, and employees.

The proposal could prove beneficial to C Corporations. However, there is an elephant in the room. Last Thursday's blog brought forth the tax changes that are likely to take place if the "Bush Tax Cuts" expire at the end of this year. There are roughly ten times more flow-through companies in American than there are C Corporations.

C Corporations may get a much needed tax break while smaller companies, the ones who do yeomen's work with hiring, spending, and innovation, are getting an increased tax bill (at least to 39% before the Medicare Tax and the loss of deductions). This obviously puts flow-through corporations at a disadvantage.

Thus we are left with two pieces of legislation that are not likely to pass in 2012, although anything is possible. One is the reduction in the top rate for C Corporations with increased taxes for companies with offshore profits. The second is the specter of increased taxes on individuals and flow-through businesses.