Tax reform--sooner rather than later?

• Author: Graham, Chris
• Position: WASHINGTON BEAT

During his State of the Union address in January, President Barack Obama asked Congress to do something it has not done in 25 years--reform the United States' corporate tax code. In a statement that sounded more like Ronald Reagan than, say, Jimmy Carter, Obama highlighted the need to change the U.S.'s standing as a country with one of the highest corporate rates in the world.

Applause lines like this sound good on their face, but what does it actually mean for taxpayers who pay the corporate rate, pass-through businesses that pay the individual rate or individual taxpayers all together?

Twenty-five years ago, leaders such as Democrats Dick Gephardt and Bill Bradley and Republicans Bob Dole and Reagan were able to put party affiliation and political ideology aside to lower the corporate tax rate from 46 percent to 34 percent.

Can Republican John Boehner (R-Ohio) and Democrats Max Baucus (D-Mont.), Harry Reid (D-Nev.) and Obama find enough common ground to move legislation that lowers the current 35 percent corporate rate to a level that enhances U.S. companies' competitive position while not pushing the nation further into the red?

Chance of Tax Reform This Year?

Washington types would question your sanity if you gave tax reform a realistic chance to be completed a year ago. But the issue has heated up since the National Commission on Fiscal Responsibility and Reform--commonly known as the Fiscal Commission--released its report late last year. The commission offered a plan that would reduce the top corporate rate to between 23 percent and 28 percent and would do so in a revenue-neutral manner.

To get to revenue neutrality, the plan proposes to get rid of most tax expenditures, including long-standing tax policies that have a number of supporters in Congress and the business community.

Some of these expenditures include last-in, first-out (UFO) accounting for inventory, treating capital gains and dividends as ordinary income and placing caps on tax-preferred contributions to retirement accounts. But, would these changes to the tax code reduce or wipe out the benefits that corporate taxpayers hope to achieve from a lower statutory rate? Questions like this illustrate why the path to corporate tax reform remains a bumpy one.

While corporate tax reform was a focus of the president's State of the Union address, a majority of U.S. businesses are pass-through entities that are taxed at the individual level. The Fiscal Commission provided...