Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation
The PERAB or “Volker Commission” has issued its Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation. It is a noble effort. It pursues several simplification and compliance options that the National Taxpayer Advocate and others have identified for years. It undertakes to be evenhanded. Nevertheless, it weighs in on the side of simplification and better compliance, which are hardly disputable goals at the macro level, while the devil is in the details. The corporate and international topics addressed by the Report are likely to be even more contentious.
Although the Report’s options are only listed as possible options, it seems fairly clear that the Board would favor lowering the corporate tax rate. The Board of course recognizes that pulling on that string could require rewinding the entire ball of business taxation, including particularly (a) various business tax preferences, and (b) taxation of foreign income. One combination of ideas in the Report that seems to fit together better than others is as follows:
- Lower the corporate tax rate significantly;
- Broaden the scope of the corporate tax to apply to more than just publicly traded active business corporations, so as to also cover large non-corporate businesses that have operated as passthroughs;
- Eliminate or reduce various corporate tax preferences (i.e., broaden the base);
- Tax worldwide income.
Only the first of these steps would be easy. The next three would be very difficult, with the last perhaps the most difficult of all. Foreign income deferral is a perennially vexed issue; when last examined it led to the subpart F compromise of the Kennedy era that has produced an explosion of rules and regulations and planning, the complexity of which drives the search for another approach. The betting person would expect some other such compromise to result, assuming anything at all is done, in lieu of moving to a total territorial or worldwide system. And yet, if any proposals at all ever come into play, this element cannot be avoided.
As to the second and third elements, the Report touches on but does not emphasize two iconic proposals of the past: corporate tax integration (which is just the opposite of applying the corporate tax to other businesses) and some sort of business tax that replaces the corporate tax (which would apply the business tax to a broader group of taxpayers and also could rejigger deductions). Perhaps the reduced taxation of dividends received by individuals, plus the large NOLs recently incurred by many businesses, has reduced the pressure for corporate tax integration. And perhaps the expansion of the corporate tax to cover all large businesses would be an incremental way to move partly to a general business tax with VAT-like qualities.
From whence would come the political will to address any of these proposals seriously is a mystery for which no one has suggested a good answer. Revenue needs is an obvious theoretical motivator, but so far has not worked. Moreover, none of the Report’s proposals focuses so much on net additional revenue as on structural changes to a system. The 1986 Act was designed as revenue neutral. Even if the sort of proposals suggested by the Report could be revenue neutral, they would be hard to accomplish; raising revenue seems impossible.
Yet to come is the report of the President’s “debt commission” that is studying the fiscal shortfall. Presumably the Volker Commission deferred to the debt commission on this issue. It could add to the above mix a proposal for a totally separate VAT, which would create a stew of five or more high voltage issues coming together at one time. Assuming that the revenue needs drive a tax increase, it is hard to see how (a) the additional taxes can come from anywhere other than the general public through a VAT or otherwise, and (b) the good government/structural changes addressed by the Volker Commission could find a way into law.
Jack Cummings 919-862-2302