So, you want lower corporate tax rates? Are you willing to give up business dinners for it? That’s one of the recommendations (sure, one of the minor ones) from the Committee for a Responsible Federal Budget, a non-partisan public policy think tank. The paper, out today and titled “Reforming the Corporate Tax Code,” describes the ways and means of moving the top corporate rate from its current 35% down to around 25% or 28%. Lowering the corporate rate that much is going to cost something, so the CRFB spells out what items would be ripe for adjustment in order to pay for a reduced corporate tax rate.
The paper puts the most weight behind revising the accelerated depreciation rules and the way that income earned offshore is taxed. For those outside the accounting game, depreciation is the manner in which a company expenses the cost of a long-lived asset to best match its economic life. Under regular depreciation, you take the cost, divide by the useful life, and you’ve got your annual depreciation. Under accelerated depreciation, you front load the depreciation schedule and take bigger expenses earlier and smaller expenses later. Eliminating accelerated depreciation, the CRFB estimates, would buy you 5.28% worth of rate reduction. The problem is…accelerated depreciation is fairly popular, and using it encourages firms to buy new equipment. Now, getting rid of accelerated depreciation would definitely affect some firms more than others. Industries requiring large outlays for infrastructure and equipment would feel the sting more than asset-light industries.
The other big issue that the paper tackles is international taxation. Currently, U.S. companies with offshore operations typically don’t have that offshore income taxed until it’s repatriated back to the States. As the CRFB point out, this “discourages multinational companies from repatriating income to the U.S. and encourages them to shift income out of the U.S.” Their proposal suggests what’s called the “worldwide system,” whereby income is taxed when it’s earned, rather than when it’s repatriated. I suppose the hope is that lower corporate tax rates in the United States will make firms more willing to either move their income back onshore, or conduct more activity onshore.
Some of the other proposals they put forth are getting rid of tax loopholes that are targeted at specific industries or specific companies, legalizing and taxing Internet gambling, and indexing the corporate interest deduction for inflation. They also figure disallowing deductions on meal and entertainment expenses (goodbye expense accounts!) would garner about 1.02% of the rate reductions. That’s bound to cut into corporate wining and dining.
There’s almost no chance that anyone in Congress touches this until 2013, but maybe after all the election-year rancor settles down. There are already several proposals (from both Democrats and Republicans) out there that have various elements of the CRFB proposals, so I think there could be bipartisan support to get something like this done. We just may have to wait a bit before we see it.
If you’ve got about 15 or 20 minutes, the full report is worth a read. You can find it here.