Treasury conferees agree corporate tax must be overhauled

Last week, members of the U.S. Treasury met with executives and economists for the purpose of discussing America's system of corporate taxation in terms of global competitiveness. At the conference, Treasury Secretary Henry Paulson received support from participants for considering an overhaul of the U.S. business tax system.

Among those in attendance were former U.S. Federal Reserve Bank Chairman Alan Greenspan; Martin Feldstein, professor of economics at Harvard University and former chairman of the President's Council of Economic Advisors; Michael Boskin, professor of economics at Stanford University and former chairman of the President's Council of Economic Advisors; and executives from FedEx, Oracle, and Caterpillar.

A Treasury report illustrates that the U.S. average statutory corporate tax rate is 39% when considering both federal and state income taxes, the second-highest among industrialized nations in the Organisation for Economic Cooperation and Development (OECD), second only to Japan, and Japan is preparing to lower its rate. And while many companies pay a much lower tax rate, that reduction is due to tax deductions and credits which, as Paulson points out, distort economic decisions with special provisions that encourage businesses to make decisions based on favorable taxation and encourage investment in tax-favored activity.

In a recent editorial that appeared in The Wall Street Journal, Paulson praised President Ronald Reagan's 1986 tax reformations, stating, "The 1986 tax reform recognized that if there is a prescriptive role for business tax policy, it is to free companies to put capital to its best use, which is essential to grow and sustain higher standards of living for U.S. workers. In stead of building on the proven success of these reforms, we have moved in the opposite direction, making the code more complex, adding narrow provisions that crate or respond to current headlines."

A background paper issued by the Treasury Department last week, listed some tax breaks that, if eliminated, would allow the overall top corporate tax rate to be cut from the current 35 percent to 27 percent with no loss in revenue to the government. The preferences included on the Treasury Department list are:

  • Deduction for U.S. production activities

  • Exclusion of interest on state and local bonds

  • Research and experimentation (R&E) tax credit

  • Deferral of income from controlled foreigh corporations

  • Low income housing tax credit

  • Exclusion of interest on life insurance savings

  • Inventory property sales source rules exception

  • Special ESOP rules

  • Exemption of credit union income

  • New technology credit

  • Special Blue Cross/Blue Shield deduction

  • Excess of percentage over cost depletion, fuels

    Attendees at the conference reached agreement that the current U.S. tax system is hurting America's ability to compete against other nations with lower corporate tax rates. "There is a strong consensus that our business tax system is far from optimal and is undermining the competitiveness of American workers," said Paulson.

    Corporate leaders in attendance at the one-day conference agreed that they would be willing to sacrifice certain tax benefits in exchange for a lower overall corporate tax rate. Paulson has pledged to follow up with suggested improvements, changes, and proposals in the coming months.

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