Talks Begin on Corporate Tax Revisions

Talks on Corporate-Tax Revisions Set to Start.

One likely focus of the discussions will be finding ways to use an overhaul to encourage more investment in the U.S.

President Barack Obama pushed through a temporary tax break on new business equipment as a spur to investment in last month's tax deal that extended Bush-era income-tax levels.

But many experts believe more fundamental tax changes are needed to draw investment to the U.S. and strengthen the tepid recovery. That has led Mr. Obama and his top aides to consider embracing a corporate-tax overhaul as a major goal for the new Congress, where business-friendly Republicans have gained power. Recalibrating corporate taxes also could boost the administration's efforts to mend frayed relations with business leaders.

Several possible elements of a revised corporate-tax structure could encourage investment. A lower U.S. tax rate, for example, could reduce some incentives for U.S. companies to shift assets to lower-tax countries. Many corporate leaders want Washington to reverse its longstanding policy and let them bring back billions in overseas profits without being taxed in the U.S.

Finding any new tax breaks that can meet the administration's tough budgetary standards is likely to prove a struggle. Mr. Obama is insisting that changes to the corporate-tax code not add significantly to the government's already dire fiscal problems.

That means the budgetary cost of new tax benefits—including a lower rate—likely would have to be made up through elimination of other popular business breaks.

Proposed Fundamental Changes to Tax Code

According to the WSJ, tax-reform plans proposed by President Obama's deficit-cutting commission would radically change corporate tax policy and, business groups say, could improve U.S. competitiveness in global trade. The proposed changes could also create winners and losers among U.S. companies.
Business groups and economists have long sought fundamental changes to the tax code, which hasn't been overhauled since 1986.

Although we may be in need of a tax overhaul, how do we decide on the right one?  Small businesses drive this countries economy, creating new jobs and opportunities.  Taxes have become so complex and convoluted, it seems there is no light at the end of the tunnel. So how can we in theory create beneficial tax laws that still support business and entrepreneurs? Are these proposals a major step forward, or just additional red tape to the never ending tax code?

Here are the proposed plans-

Option 1, called The Zero Plan, would impose a rate of 26% to 28%, down from the current 35%. In return, it would eliminate all or most "tax expenditures," or provisions such as capital gains or tax credits that lower a company's tax bills.

Option 3, called the Tax Reform Trigger, merely says that if Congress hasn't cut the deficit by 2013, then companies would be subject to a 15% reduction in all general business-tax credits.
Option 2 is more detailed, and is based on a proposal by Sen. Ron Wyden (D., Ore.) and Sen. Judd Gregg (R., N.H.). In return for a 26% tax rate and a permanent extension of the temporary research-and-development tax credit, it would eliminate certain popular deductions, including one for domestic manufacturing. It also would cut various oil-and-gas tax breaks, and modify depreciation, a tax treatment that often provides companies with tax-minimizing deductions soon after property or equipment is acquired.

Perhaps most important, Option 2, and variants of Option 1, would shift the U.S. to a "territorial" tax on corporate income, a change business groups have endorsed. The current system taxes foreign corporate earnings at the U.S. rate only when they are repatriated, which might encourage U.S. multinationals to keep profits offshore.

We believe in the power of business and how it fuels the economy.  This should be interesting given the job growth in our country is due to small business.  We will definitely keep our ears to the ground on this.

Mazuma Capital