Taxes: Reform On Agenda In House And Senate

Rep. Dave Camp (R-Mich.), chairman of the tax-writing House of Representatives Ways & Means Committee, says he intends to pursue comprehensive tax reform this year, addressing the codes for both individuals and businesses.

“Now that we have permanently settled how much revenue the government is going to take out of the economy, we can move on to the next steps,” Camp said earlier this month after lawmakers passed legislation that averted the so-called fiscal cliff—the combination of tax cuts expiring and the kicking in of automatic, across-the- board federal spending cuts—but raised upper-bracket personal income tax rates.

“Simply put, the tax code is a nightmare. It is too complex, too time-consuming, and too costly,” Camp remarked. “We need to make the tax code simpler and fairer for families and small businesses. And, we need to pursue comprehensive and fundamental tax reform to make American businesses and workers more competitive in the global marketplace.”

Senate Finance Committee Chairman Max Baucus (D-Mont.) agrees that tax reform will be on the agenda in 2013. “Reform is critical—individual and corporate,” he says.

Business groups have long advocated for changes in the structure for corporate taxes that include lowering the 35% rate—now the highest in the industrialized world—and ending double taxation of foreign subsidiaries of U.S.-based companies.

“It’s difficult to compete globally when you’re faced with this large tax burden,” says Jay Timmons, chief executive officer of the National Association of Manufacturers, an industrial trade group with more than 14,000 member companies.

Camp, who released a draft proposal to rewrite international tax laws last year, wants to lower the corporate tax rate to 25%. Obama has also offered a blueprint, suggesting that rates be cut to 28% for most firms and 25% for manufacturers.

Under both plans, the rate cuts would be accompanied by the elimination of some of the many deductions and tax credits that allow companies to pay a much lower effective rate and sometimes to avoid paying any corporate taxes at all.

But there is significant disagreement over how income earned abroad by corporations should be taxed. Camp favors a territorial system in which multinational corporations pay taxes on earnings only in the country where the income is generated. Twenty-eight of 34 nations in the Organisation for Economic Cooperation & Development, including Japan and the U.K., use the territorial system.

However, Obama and congressional Democrats are largely opposed to that approach and say that corporations should continue to pay an additional U.S. tax on their overseas earnings. Maintaining the taxation of foreign-source income is necessary, they argue, to discourage companies from relocating their production abroad in search of potentially lower taxes.

The American Chemistry Council (ACC), which represents major chemical manufacturers, and other trade associations say this double taxation puts U.S.-based companies at a competitive disadvantage.

“The President has said he wants America to lead the world in manufacturing, and we strongly support that goal,” says Calvin M. Dooley, ACC’s chief executive officer. “Getting there will require a fair, simple tax system that allows U.S. companies to compete evenly abroad.”