Corporate tax reform legislation? Definitely a possibility: but window for passage may be quite small, experts say.

Author:Morell, John
Position:Cover story
 
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It's been a decade since Republicans controlled Capitol Hill. But now that the GOP will be setting the legislative agenda in 2015, one major issue that has been debated, grumbled about, and kicked around among both parties may finally lead to new legislation: corporate tax reform.

Still, even the most ardent proponents of reform would agree, revising the corporate tax code is a tricky proposition at best. The last time the corporate tax scheme was overhauled was almost 30 years ago, when rates dropped from 48 to 34 percent. That measure-- TRA-86--also removed several tax loopholes and trimmed business deductions. The overall economic climate is quite different today, with the ubiquitous presence of the Internet and the rise of China as a global powerhouse.

"There was bipartisan agreement that we were in need of individual and corporate tax reform in the mid-1980s," says Jon Traub, principal with Deloitte Tax in Washington, D.C. "It was seen as essential to keep the economy going strong. I don't know if we have that kind of agreement between the parties [that we had back then] that can make reform happen. Most experts see tax reform as moving in one of four ways: corporate, business, individual, or comprehensive. "I think it would be a mistake to reform the taxation of corporate income but not do the same for noncorporate business income," says Traub.

"A great deal of business income in America is earned by pass-through entities and is taxed on an individual schedule, not a corporate schedule, so you're leaving out a great number of businesses if reform is targeted only at reducing the corporate rate. In fact, such a plan could be a real loser for those pass-throughs, since they might both lose some of their current tax preferences but see no reduction in their tax rate."

With the U.S. corporate tax rate the highest among the 34 nations that are part of the Organisation for Economic Cooperation and Development (OECD), and with the world's economy becoming increasingly globalized, the key question is whether there really is a consensus among Republicans and Democrats that corporate tax form is "must-have" legislation.

Beneath the Surface: Real Disagreements

Doing the nitty-gritty work of negotiation and compromise won't be easy, experts interviewed for this report agree. "When you scratch beneath the surface, that's where you find the real disagreements," says Traub. "It's going to take real will from the serious policymakers in Congress to understand the interests of sides and come up with a bipartisan bill that the president can sign."

"Hope springs eternal," says John Gimigliano, principal in charge of the Federal Legislative and Regulatory Services group for KPMG's Washington National Tax practice. "The White House is talking about tax reform, which is a good sign, and plenty of work has already been done on it with [House Ways and Means Chairman] Dave Camp's draft. It's a matter, then, of negotiating the scope of what the reform is going to look like, and that includes such issues as revenue neutrality, corporate comprehensive reform, and international taxation."

For tax watchers, this may seem like a 180-degree turn from last winter. At that...

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