The Global Manufacturer: Death and Tax Reform: Are They Both Inevitable?
It says a lot about the state of governance in the United States that Rep. Dave Camp is receiving high praise for issuing a draft proposal to reform the tax code. Remember, we pay 535 people in Washington to deal with just these kinds of messes. So it really shouldn't be a cause for celebration when one of them tries to do something constructive… but it is.
Just to make sure there was little chance the American people's faith in Congress was restored, leaders in both the Senate and House of Representatives let it be known that Camp's proposal was "dead on arrival." And that's for something almost everyone in Washington agrees is needed. Camp, a Michigan Republican and chairman of the House Ways and Means Committee, bravely made the rounds of television and radio talk shows to argue that many groups supported him and that the tax system can't wait to be reformed if we are going to promote job growth.
If not dead already, Camp's proposal is sure to be beaten, mugged, kicked and gouged on its way to forming some aspect of tax reform. So let's look at some of the major elements of the bill while the 979-page text remains relatively clean and fresh. • Reduces seven tax brackets to three -- 10% for individuals with income below $35,600 or joint filers with income below $71,200, 25% above that income level, and 35% (25% plus a 10% surcharge) for those with incomes above $400,000 or joint incomes above $450,000. • Reduces the corporate tax rate from 35% to 25%, roughly the average of the other OECD nations. This rate would be phased in from 2015 to 2019. • Taxes long-term capital gains and dividends as ordinary income, but shields 40% of this income from tax. • Exempts manufacturers from the 10% surcharge on incomes over $400,000. As a result, small manufacturers with pass-through income would be taxed at the lower 25% rate. • Shifts the U.S. to a territorial tax system. The Camp proposal would impose a one-time 8.75% tax on cash currently held abroad by U.S. companies. Going forward, the proposal would exempt 95% of foreign income from U.S. taxes. • Makes the R&D tax credit permanent. Camp said his aim was to simplify the tax code while producing a revenue-neutral reform package. To do that and lower rates, Camp's proposal eliminates or caps hundreds of tax deductions and credits for both businesses and individuals. But he said cutting the size of the code by 25% and lowering tax brackets would stimulate a sluggish economy, helping to create 1.8 million new jobs and increase U.S. gross domestic product by up to $3.4 trillion. Will it work? Initial response to the proposal was as fractured as our nation's politics. The National Association of Manufacturers was cautious, stating that comprehensive tax reform was needed for economic growth and that "any change needs to be looked at very carefully." Looking askance at Camp's recommendations to do away with several oil and gas industry tax breaks, American Petroleum Institute President Jack Gerard cited "serious flaws" in the proposal "regarding cost recovery and LIFO accounting that could hurt jobs, American energy production and our energy security." Camp's revenue-neutral plan, the New York Times complained, "refuses to ask for greater sacrifice from the rich to bring in desperately needed revenue for rebuilding the country and improving education," but also skirted calls by Republicans for "slashing revenue." As a result, the Times stated, the plan "ensures that there will be no tax reform in the near future."
Read more about the tax reform debate and how it will affect manufacturing at iw.com/tax-reform.
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But no action on tax reform just might suit a number of U.S. corporations if we are to believe a new study by Citizens for Tax Justice. The study examined Fortune 500 companies that have been consistently profitable for the past five years and found that those 288 companies averaged a 19.4% effective tax rate. Some paid little or no tax at all, according to CTJ. If we can do that to the IRS, then Death must be shaking in his cloak.
Correction: An earlier version of this column referred to Rep. Camp as a Wisconsin Republican. He represents the Fourth Congressional District of Michigan.