Tax Reform – Lower Rates And Rapid Depreciation… Possible?

TaxConnections Blog PostThe National Association of Manufacturers (NAM) sent a letter (10/28/13) to Congress about the upcoming budget conference. NAM comments on various budget related topics including tax reform and entitlement problems. Regarding tax reform, NAM suggests that tax reform include:

1. 25% corporate rate

2. Lower taxes for S corp owners

3. Permanent and competitive research incentive

4. Competitive international system

5. A “robust capital recovery system to spur business investment and expansion in the United States.”


While they specify a rate for corporate tax, they don’t for S corp shareholders. Does that mean they don’t think it should be as low as 25% or perhaps it can’t be in a revenue neutral manner? They might also be recognizing that not all passthrough entities have lots of income (and thus might already be taxed at rates well below the maximum rate of 39.6%) and are really more focused on publicly-traded corporations.

They do not mention how to get the rate lowered in a revenue-neutral manner (assuming they are calling for a revenue neutral manner). In an October 2011 report by the JCT, they noted that is would cost about $76 billion per year to get to a 28% revenue neutral rate. The largest tax expenditure they reduced to get to a possible revenue neutral rate reduction was to switch from MACRS depreciation to the slower ADS rules. That covers about 70% of the rate drop! JCT also included repeal of R&D expensing which would generate perhaps $16 billion per year. They did not have to estimate a cost of repeal of the research credit because that was already terminated when they did their report (it was extended through the end of 2013 by the American Taxpayer Relief Act of 2012 on 1/2/13).

So, how is a lower corporate tax rate to be achieved? Will Congress do it with timing items (such as depreciation, R&D expensing, LIFO repeal) or will they somehow find revenue from permanent changes, such as repeal of the Section 199 manufacturing deduction? That won’t be enough though. I think they will have to look at increasing the individual capital gains rate. That might take going back to the Tax Reform Act of 1986 when the maximum rate for individuals on all income types was 28%.

In accordance with Circular 230 Disclosure

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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One comment

  1. Brian Huber says:

    Far more business income is generated from proprietorships and pass-through entities than from C corporations taxed at corporate rates. But job creation has lagged for the businesses taxed at personal rates. These entities are in greatest need of tax reduction to trigger higher capital formation. Small unincorporated operations are certainly not qualifying for bank financing to raise capital. When the pool of capital is not rising among small businesses, they cannot create jobs that lead to increases in real wages. If real wages could rise, government expenditures for transfer payments may be allowed to fall. Hence, a policy designed to make the US treasury revenue neutral is unnecessary.

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