May 30, 2012
When it comes to taxes and economic growth, the most visible battle cry among businesses is to slash tax rates. Multiple business advocacy organizations and a string of Republican lawmakers say dropping the top federal U.S. corporate rate from 35 percent to 25 percent would boost U.S. companies to hire, invest, and compete globally.
For corporate finance chiefs, however, lowering rates is not top of the agenda. What worries them most is the whole slew of business-centric tax changes set to take effect in 2013 unless Congress steps in-- what economists have dubbed “Taxmageddon.”
A survey released Tuesday by tax firm Alvarez & Marsal Taxand shows that of 302 chief financial officers surveyed by, a majority said eliminating uncertainty in the tax code topped lowering tax rates on their wish lists.. About three-quarters of respondents represent firms with less than $1 billion in revenue, while the remaining quarter represent billion-dollar enterprises.
Nearly three-quarters of businesses perceive that lawmakers’ current tax reform proposals are too premature to determine how they will affect their businesses, the survey found.
“Confidence in knowing precisely what the tax code will require has become more important than how much it will cost them,” said Robert N. Lowe, chief executive officer of A&M Taxand. “As long as proposed changes remain up in the air, companies will be forced to continue to burn fuel operating in holding patterns rather than charting productive courses forward.”
Some of the most consequential business-related tax code changes set to take effect next year include the expiration of the research and experimentation credit, a cut deducting certain business purchases from $500,000 to $125,000, the end of accelerated depreciation on certain business property, a rise in the capital gains rate from 15 percent to 20 percent, and taxing dividends as ordinary income at a top rate of 39.6 percent.
Perhaps of most consequence to small business owners is that the top individual tax brackets will rise from 33 to 36 percent and from 35 to 39.6 percent in 2013 if the Bush era tax cuts expire. That’s because small firms can structure themselves as subchapter S corporations, partnerships or pass-through entities (LLCs), or sole proprietorships —the most common classification which accounts for about three-quarters of small businesses. Businesses organized in those formats pay individual income taxes in lieu of corporate income taxes. The total number of small businesses arranged this way shot up to 27 million in 2007 from 18.4 million in 1997, according to the Census Bureau.
Business advocates say that while slashing the corporate tax rate is a goal, the looming uncertainties about current tax law need to be front and center for the time being.
“Businesses right now feel immensely paralyzed by the fact that they have no certainty,” said Caroline Harris, chief tax counsel for the U.S. Chamber of Commerce. Harris and the Chamber support overhauling the tax code to lower corporate tax rates and revamp the individual tax codeBut the immediate priority is extending the Bush-era tax cuts and extending these expiring tax provisions. “They don’t know what their rates are going to be in six months, what deductions and credits are going to be in the code, and they have no idea what’s going on with bonus depreciation and expensing…Right now, that’s what needs to be taken care of.”
However, other tax experts take a different view. Martin Sullivan, a former Treasury Department economist and contributing editor at Tax Analysts says he’s puzzled by the business community’s preoccupation with tax uncertainty over rates. “To say uncertainty is the cause of all businesses problems now or is an excuse for not investing in their long-term future is not rational. Businesses always face uncertainty, and let’s face it. Even if a tax law gets passed, you have very little certainty that that will be tax law five years from now. In fact, you can almost guarantee it won’t be,” Sullivan said.
He said he does not believe that any business executive would realistically be more concerned about uncertainty in the tax code than the level he or she is being taxed at. “I think this is a line businesses have adopted to put political pressure on Washington to lower their taxes. What they’re really saying is they want a tax cut because that’s the only way their uncertainty can be resolved given their firm no-tax increase negotiating positions.”