President Bush's economic team faced tough questions on tax at a briefing on the US economy on July 27, the day after a Treasury conference on business taxation.
The Treasury conference resulted in an overwhelming feeling that changes to the system were crucial for the US to continue to thrive in global markets, a fact not lost on Hank Paulson, the Treasury secretary: "What struck me was...how clear everyone saw it that we had gone from having a corporate income tax that in the '70s wasn't competitive, to one that in the late '80s, with the '86 reform was relatively low, to now one which is relatively high," he said at the following day's economic briefing.
While many tax directors and practitioners believe changes will not come before the federal election in November 2008, Paulson is keen to make progress during this time: "We're going to reassess where we are, and you're going to see a number of actions and steps taken over the next 18 months on this," he said
Tax professionals were not as hopeful: "I would be very surprised to see major changes in the corporate tax system before the election," said Kim Barr, a managing director at Alvarez & Marsal Taxand.
"I don't expect any significant changes to be enacted in the next 18 months," said Philip Morrison, a principal at Deloitte Tax. "But if the Treasury continues to take the issue of reform as seriously as it is today, then we might see solid proposals for reform at the end of that time."
A lack of pressure from taxpayers for immediate reform seems to be the main obstacle to change:"There isn't the groundswell for it to happen at the moment," said Morrison. "In any tax legislation, there are winners and losers. I don't think the corporate community has articulated a consistent position," said Barr.
There is plenty of discussion about what needs to change: "I could bend your ear for an hour about what needs to happen! In a word, simplification," said Morrison.
Base broadening and rate reduction were the key principles that came out of the Treasury conference. Professor Michael Graetz of Yale law school proposed the introduction of a federal VAT to pay for any rate reduction. "This idea should be taken very seriously," said Morrison. "But this could be a problem. Some people think a consumption tax would not be progressive for the US."
The compliance load also needs attention. "Corporations that I interact with are concerned about the burdens imposed by the Sarbanes-Oxley Act, as enforced by their independent audit firms," said Barr. "They believe that the financial statement reporting requirements for tax are unrealistic and extremely burdensome."
With lots to change and not much hope of drastic action in the near future, the political tension that surrounds any alterations to the fiscal system is clear.
"Every few years we engage in a policy debate," said Barr. "On one side, the proponents of simplification want to eliminate corporate loopholes and may be willing to lower tax rates in the process. The opponents believe that targeted incentives (loopholes) are more effective in stimulating economic growth."
The Ways and Means Committee, the tax-writing body of the House of Representatives, is ready to hear about proposed changes: "Secretary Paulson knows that if he wants to move forward on tax reform, my door is open – in fact, he doesn't even have to knock," said chairman Charles Rangel. Whether they will act on them however, is another question.
