Economists Back US Corporate Tax Cut

by Mike Godfrey, Tax-News.com, Washington

15 April 2010

Leading economists are backing legislative efforts to cut the US corporate tax rate to 24% and rid the US tax code of the myriad exemptions, deductions, credits and other preferences that create complexity.

With less than 9 months remaining until the tax relief provisions of 2001 and 2003 expire, a bipartisan proposal to reform the tax code has, according to its sponsors "turned the heads  of economists and academics across the country."

In addition to lowering taxes for middle class families, the 'Bipartisan Tax Fairness and Simplification Act of 2010' attempts to create a level playing field for businesses of all sizes by reducing the corporate tax rate, which is currently the second highest in the industrialized world, to a flat rate of 24%. The bill also makes a clean sweep of the US tax code in order to create a simpler and fairer system that American workers and businesses can more easily navigate.

According to the bill's principal sponsors, Senators Ron Wyden, an Oregon Democrat, and Judd Gregg, a New Hampshire Republican, the overwhelming majority of a poll of over 100 leading economists responded that the proposals are "a step in the right direction."

"Our approach makes sense," Wyden commented. "By eliminating tax breaks and loopholes that disproportionately reward special interest groups and incentivize companies to export US jobs, it becomes possible to give real tax relief to working families and businesses that create jobs here at home.”

“I am pleased to see such widespread support among leading economists for our bipartisan tax reform package," Gregg added. "We all agree that our income tax system is overly complicated, burdensome and unfair to small businesses that are the economic engines of our nation.  By putting in place these common-sense tax reforms, we will encourage businesses to expand, create jobs, and make our nation more competitive.  Furthermore, the flat 24% corporate tax will encourage capital investment and long-term economic strength in our country. ”

The Bipartisan Tax Fairness and Simplification Act follows the model of the Tax Reform Act of 1986 which funded tax relief by eliminating a number of special interest tax breaks. Wyden and Gregg say that their proposal would provide tax relief for most families making up to USD200,000 a year with a similar approach.

For individuals, the bill would:

• Eliminate the Alternative Minimum Tax;
• Reduce the number of individual tax brackets from the current six to three: 15%, 25%, and 35%;
• Increase the standard tax deduction almost three-fold, reducing individual tax bills and reducing record-keeping obligations;
• Enable a simple one-page 1040 tax return form with the option that taxpayers can request that the IRS prepare a tax return for them to review and sign.

For business, the bill would:

• Allow more than 95% of small businesses – those with gross annual receipts of up to USD1m – to permanently expense all equipment and inventory costs in a single year;
• Reduce the top corporate tax rate and replace the existing six corporate rates and eight brackets with a single flat rate of 24%;
• Eliminate a number of specialized tax breaks that favor one business sector or group of individuals over another, thus making the tax code simpler and fairer;
• Retain preferential treatment for capital gains in order to encourage investment, by creating a new 35% exclusion and a progressive rate structure for dividend and long-term capital gains income. The bill would also cut the holding period to six months from one year for the first USD500,000 of a taxpayer’s capital gains income;
• Repeal the rule that allows US companies to defer taxes on their foreign income;
• Create a more even playing field between corporate debt and equity by cutting the value of inflation from a corporation’s interest deduction on debt.

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