willspring55, April 22, 2013
By T Schelmetic
Although many businesses and trade groups have long advocated changing
the U.S. corporate tax system, the prospect of having a lower tax rate
but losing various loopholes has made some companies nervous about
reform – particularly in the manufacturing sector.
It’s an oft-repeated maxim that U.S. businesses pay a higher
corporate tax rate than businesses in most other industrialized nations.
The current U.S. corporate tax rate is 35 percent, compared to 26
percent in the U.K., 15 percent in Canada, and 25.5 percent in Japan.
Few U.S. companies, however, actually pay 35 percent. Their effective
tax rates – or the real amounts they pay – are determined by a complex
series of tax break provisions (or “loopholes”) that are different
depending on industry sector.
Total corporate federal taxes paid hit a low of 12.1 percent of
profits in the U.S. in 2011, according to the Congressional Budget
Office. This is the lowest level since 1972. Between 1987 and 2008, this
figure was about 25.6 percent.
Corporate tax reform has been an industry issue for years. Reform,
should it come, could theoretically take the form of a lower flat tax
rate (25 percent instead of 35 percent) that applies to everyone. In
exchange for this lower, all-inclusive tax rate, companies would give up
their special tax breaks.
While it sounds attractive on paper, some businesses are beginning to
get nervous now that actual tax reform may be imminent. Few companies
or industry groups want to let go of their special provisions, as a flat
tax with no loopholes may actually result in higher payments.
According to an analysis from the New York Times,
there is a large gap in effective tax rates by industry, with
electrical utilities in the eastern U.S. paying the top rate of about
33.8 percent. Drug and biotech companies, at the bottom, pay an average
rate in the mid-single digits thanks to extensive tax breaks for
President Barack Obama is keen to reform the lopsided model.
“It makes no sense, and it has to change,” Obama said in his 2011
State of the Union address. “Get rid of the loopholes. Level the playing
field. And use the savings to lower the corporate tax rate for the
first time in 25 years — without adding to our deficit. It can be done.”
Lobbying groups representing businesses from roofers to beer brewers
have weighed in with the House Committee on Ways and Means, which is
tasked with tax reform, to protect their provisions. The oil and gas
industry has lobbies to preserve breaks for exploration and drilling.
The U.S. Chamber of Commerce has declared that any tax reform should
protect breaks for capital investments, such as new machinery, while
pharmaceutical and technology companies maintain that tax credits for
research should be preserved.
Manufacturers may have the most to lose in tax reform because they
have one of the lowest effective rates: 17 percent, thanks to loopholes
such as accelerated depreciation on manufacturing equipment.
Manufacturers that operate on U.S. soil can also deduct nine percent of
their taxable income. That particular loophole is worth about $8.9
billion each year.
The National Association of Manufacturers (NAM) supports lowering the
tax rate but also believes that some credits for research and
development and accelerated depreciation should be maintained to ensure
that reform doesn’t raise effective rates.
“Because of the critical importance of manufacturing to our nation’s
economy, any effort to rewrite the federal tax code should result in a
fiscally responsible plan that allows manufacturers in the U.S. to
prosper, grow, and create jobs and also enhances their global
competitiveness,” Dorothy Coleman, NAM’s VP of tax and domestic economic
policy, told IMT. “Manufacturers have long held that in order to
achieve these goals, we need a comprehensive tax reform plan that both
reduces the corporate tax rate to 25 percent or lower and includes
permanent lower rates for the nearly two-thirds of manufacturers that
are organized as flow-through entities.”
Coleman added that any comprehensive tax reform must include a shift
from the worldwide system of taxation that is in place today to a
competitive territorial tax system, a permanent and strengthened R&D
incentive, and a strong capital-cost-recovery system.
It seems unlikely, however, that the Obama administration will sign
off on any deal that involves lowering the corporate tax rate without
closing loopholes, a move that would cause a net loss in tax revenue.
The House GOP budget led by Representative Paul Ryan of Wisconsin, calls
for a reduction of the tax rate to 25 percent without eliminating any
tax breaks, which is unlikely to find bipartisan support in its current
Industrial companies know the current system needs reform, and the
opportunities being presented to them seem moderate compared to others:
Senator Bernie Sanders of Vermont has proposed taxing corporations’
overseas profits at U.S. rates, a move that would raise $590 billion
over 10 years. While Sanders’ proposal is unlikely to see the light of
day anytime soon, political shifts in the future (such as a Democrat
House Majority, for example) could put such proposals – and the
loopholes – back on the table.