A reduced corporate tax rate, elimination of many business tax preferences, a new minimum tax on overseas profits, and much more are all part of President Obama’s recently released Framework for Business Tax Reform (the “Framework”). The much-anticipated blueprint of the administration’s plans for corporate tax reform was unveiled on February 22, 2012, in Washington, D.C.
The Framework contains a large number of general business-oriented proposals which, according to the administration, will make the Tax Code less complicated for businesses and increase the nation’s competitiveness in the global economy. A reduction in the corporate tax rate would be fully paid for by repeal of business tax preferences. The Framework also calls for a new minimum tax on overseas profits and encourages companies to return work to the U.S. by offering a new relocation tax incentive.
Congressional reaction to the administration’s Framework was mixed. Democrats in Congress generally applauded the Framework for laying out a plan to reduce the corporate tax rate, a proposal that enjoys bipartisan support in Congress. Republicans were less enthusiastic, but some GOP lawmakers said that the Framework could serve as a starting point for comprehensive tax reform. While the November elections certainly play a part in the release of the current proposals, major tax reform now is considered inevitable by most observers. The question remains, however, as to how it will develop over the coming months.
The President’s overall proposal, which currently is framed only in general terms, is grounded in five elements:
- Eliminating tax expenditures and subsidies, broadening the corporate tax base, and cutting the corporate tax rate from 35 percent to 28 percent
- Strengthening U.S. manufacturing and innovation by effectively lowering the rate for manufacturers to 25 percent (through an enhanced manufacturing credit), making the research tax credit permanent, and providing a number of clean-energy incentives
- Fixing the international tax system that includes imposing a minimum tax on overseas profits, creating a 20 percent tax credit for moving operations back to the U.S., denying deductions for moving operations overseas, limiting the transfer of patents and other intellectual property to offshore subsidiaries, and delaying deductions for interest paid for overseas investments
- Simplifying and cutting taxes for small businesses (not just for corporations) through a number of reforms, including a 100 percent expensing up to $1 million; cash accounting for businesses with gross receipts up to $5 million; enhanced deductions for start-up expenses, and an enhanced Code Section 45R small employer health insurance tax credit
- Restoring fiscal responsibility and not add to the deficit through making reform revenue neutral, including a need to do so for whatever portion of the $250 billion in reoccurring extender tax benefits that Congress deems necessary to continue.
Individual tax reform
In unveiling this framework for business tax reform, Treasury Secretary Timothy Geithner stated that individual tax reform does not necessarily need to be considered at the same time as business tax reform. With individual tax reform clearly the most politically volatile component to total tax reform, most Washington observers believe that tax reform will follow a sequential route, with business tax reform going first.