Taxes: smoothing the bumpy road for business.

• Author: Zerbe, Dean
• Position: Cover Story

Tax policy in Washington today can best be described as a duck with a lot of flapping of wings and honking and little to no movement. It is not a strong sign that the biggest accomplishment in tax in the first five months of the new Congress has been the repeal of the health care bill's expanded Form 1099 reporting--and even that took several tries to make happen.

So what is the road ahead for tax until the 2012 presidential elections? Let's consider the outlook for tax reform; the 2011 expiration of the alternate minimum tax (AMT) patch and business extenders; the 2012 expiration of the current tax rates for individuals, capital gains and dividends; the health care bill; and what financial executives can be doing in the meantime to cut taxes and improve their bottom line.

Tax Reform

A tax code that encourages growth, creates job, improves productivity and attracts investment and capital could politically give mom and apple pie a run for the money.

The year started with interest in tax reform prompted in large part by the report last year by the National Commission on Fiscal Responsibility and Reform (commonly known as the Deficit Commission). The commission surpassed low expectations by producing a report--especially as it relates to tax--that was viewed as thoughtful and considered, and in many ways has served as a catalyst for the discussions of tax reform with its focus on the benefits of tax reform for improving the economy, encouraging investment and creating jobs.

The Deficit Commission report has helped solidify what is a growing consensus that corporate tax reform would include moving to a territorial system, elimination of the debt/equity differential, repatriation relief only coupled with reform or eliminating or reducing many tax expenditures--all leading to lower corporate rates.

President Barack Obama has peppered his speeches with references to tax reform but he did not embrace the findings and recommendations of the Deficit Commission (although recently he has been making noises about wanting to go on a second date). Instead, he directed the Department of Treasury to issue its own report, with no set deadline. Currently, the administration does not appear to be leaning forward in the trenches when it comes to tax reform.

But though the administration has seemed tepid on tax reform, Congress has been quite engaged. The two chair of the tax-writing committee--Sen. Max Baucus (D-Mont.) of the Senate Finance Committee and Rep. Dave Camp (R-Mich.) of the House Committee on Ways and Means--have made statements in favor of tax reform, have held hearings and, probably most importantly, have together tasked the Joint Committee on Taxation (JCT) to begin reviewing tax reform and providing proposals. JCT is well-respected and viewed as nonpartisan.

Joining in the tax reform discussion has been the chairman of the House Budget Committee, Rep. Paul Ryan (R-Wis.), who put forward a vision of tax reform that involved an individual and corporate tax rate capped at 25 percent (though light on details of how to get there).

Finally, while it's hard to tell the lasting impact on the debate, two issues have caught the attention of Congress and added to the interest in tax reform. First is The New York Times story on General Electric Co.'s very low effective corporate tax rate.

Though not garnering the same headlines as GE, hearings held by the House Ways and Means Committee and a subsequent report that found the American Association of Retired Persons (AARP) is essentially the 6th largest insurance company in the country--and due to its tax-exempt status pays no tax--has also caused a good deal of head-scratching among tax writers.

The back and forth between the White House and Capitol Hill has already revealed three fault lines on achieving tax reform:

1. Who should benefit from tax reform? Treasury Secretary Timothy Geithner has repeatedly made the case that tax reform should only be about corporate tax reform. Chairman Camp has been clear that tax reform must benefit small and medium businesses (i.e. pass-throughs), as well as working families.

   Camp is absolutely correct in that there is no sizzle to the steak of tax reform (and little to no interest to voters) if tax reform is seen as merely making the world safe for accountants of the Fortune 500. The president in his April 13 speech appeared to agree with Camp, also calling for individual tax reform. So that may put to bed one issue.

2. What should be the rate of corporate tax? The administration has settled on roughly 28 percent as the target for a new corporate tax rate under reform. The Republicans, particularly Ryan, have landed on 25 percent.

   The difficulty is that there are already winners and losers under the current corporate tax system. Some industries have a fairly low effective tax rate (with GE perhaps taking the...