September 19, 2017

Senate Finance Committee Debates Business Tax Reform

At a U.S. Senate Finance Committee hearing, committee leaders and industry members outlined their recommendations for business tax reform.

Committee Chair Orrin Hatch (R-UT) said that reform must be undertaken with "an eye toward creating jobs and boosting wages for American workers." He pointed to a study that assessed the average effective corporate tax rate in the U.S. as the fourth highest among G20 countries, and asserted that the U.S. should follow suit with foreign competitors that have lowered their corporate tax rates. This trend, he said, has made U.S. businesses less competitive and inhibited capital formation. Sen. Hatch also argued that businesses should be allowed to deduct dividends paid to provide relief from "double taxation" and contended that pass-through burdens should be reduced. Sen. Hatch objected to arguments that the Republican plan will only benefit the "super-rich."

Committee Ranking Member Ron Wyden (D-OR) asserted that pass-through provisions favored by Republicans likely would result in loopholes that allow wealthy Americans to take advantage of massive tax breaks. Instead of helping small businesses, he said that it would facilitate further avoidance by "tax cheats." Sen. Wyden criticized a plan that would slash the corporate rate and "enshrine a vast array of [tax avoidance] loopholes," and suggested that ultimately it would result in a more significant tax burden for the middle class.

Tax Foundation President Scott A. Hodge outlined several priorities to consider when formulating business tax reform, including (i) allowing for full expensing for capital investments, (ii) cutting the corporate tax rate, and (iii) instituting a "competitive territorial tax system." Mr. Hodge said that full expensing would both incentivize investments and reduce compliance costs for many businesses. He asserted that the corporate tax rate should be cut to 20 percent, which could "instantly" make the U.S. more competitive with other nations. In the area of global competitiveness, he expressed support for replacing the worldwide tax system with a territorial system for all companies.

Donald B. Marron, Institute Fellow at the Urban Institute and Urban-Brookings Tax Policy Center, characterized the current system as "needlessly complex and economically harmful." He said that corporate tax cuts would benefit almost exclusively those who already have high incomes, and that preferential pass-through provisions would incentivize tax avoidance. Mr. Marron also argued that taxing pass-through income at the corporate rate would not achieve tax parity, and instead would "favor pass-throughs over corporations." He objected to plans that would fund tax cuts by limiting spending, and said that large rate reductions would need to be funded by either "rais[ing] other taxes or introduc[ing] new ones," such as a value-added tax or a carbon tax.

Troy K. Lewis, speaking on behalf of the American Institute of Certified Public Accountants, encouraged a tax plan that would allow for a greater number of taxpayers to use the cash method of accounting. He said that restricting the use of this method would impose undesirable economic outcomes, including an increased compliance burden. Mr. Lewis advocated for consistent application of pass-through rates, and said that professional services companies (such as accounting firms) should not be excluded from a rate reduction.

Jeffrey D. DeBoer, President and CEO of The Real Estate Roundtable, argued that tax reform efforts should (i) maintain the current interest deductibility rules, (ii) not extend expensing provisions to real estate, (iii) include a pass-through rate that does not include an "entity level tax or arbitrary rules that penalize general partners or raise the tax burden on carried interest," and (iv) preserve the state and local tax deduction, among other reforms that he said would help commercial real estate and benefit all Americans.