The government's answer to this conundrum "is by eliminating tax preferences," Harry L. Gutman, principal-in-charge of KPMG's Federal Tax Legislative and Regulatory Services group, said at a recent . Gutman, who was joint committee chief of staff of the House Ways and Means and Senate Finance committees from 1991 through 1993, noted that the bipartisan that President Obama appointed last year has recommended a that a lower nominal corporate tax rate be made "revenue neutral," through the elimination of many coveted tax loopholes.
Such tax preferences, which include one that rewards companies for the use of last-in, first-out accounting , are at the heart of many recent discussions about tax-reform.
Roundtable participant Eugene Steuele, the original organizer and economic coordinator of the Treasury's 1984-1986 tax reform effort, in many ways the culmination of the Reagan revolution, expressed skepticism about the effort to bring about this new version of reform. "I find it hard to believe that this tail is going to wag the dog," he told fellow panelists. "The dog is deficit reduction."
At stake is the money the federal government receives each year from corporate taxes, some $191 billion as of last year, or 9% of overall revenue. The NCFR grabbed headlines last year by proposing a host of corporate and individual tax proposals designed to reign in the deficit. The commission proposed that business taxation be reduced to a one-bracket 28% of income, paying for this nominal reduction by eliminating such goodies as the domestic production credit and other general business credits, as well as prohibiting the LIFO method of inventory accounting, which has been allowed in the U.S. since the 1930s but is effectively prohibited under International Financial Reporting Standards (IFRS).
It is the LIFO change in particular that is beginning to arouse much opposition in the business community. Trade groups, including representatives of industries such as petrochemicals and equipment leasing dealers, are prominent members of the , an alliance dedicated to fighting the proposed revision.
"It's one of the things I keep my owner apprised of," said Bill Van Voorhis, vice president of finance at ., a privately held, Knoxville, Tenn.-based equipment dealer.
While declining to give specifics, Van Voorhis said in an interview that Stowers has a "significant" LIFO reserve and would probably be among the losers if the accounting option were to be eliminated. "From a company standpoint, it definitely means that we'll have to pay more taxes," he said.
He added, "Some companies, especially mid-sized and smaller companies, would really struggle, especially in today's economy. You take money out of companies and that's less than we can invest in the operation." Of course, the magnitude of the hit could be reduced by a proper phase in, say of "five to seven years so we don't have to pay (LIFO reserves) out all at once."
He admits that LIFO isn't as big a deal as it was two or three decades ago, "when double-digit inflation" was raging. There still is underlying concern because of the indirect hit taken by companies such as his due to the recent spikes seen in oil and other commodity prices. And while his company does business domestically, multinationals have already had to perform much of the transition because of IFRS.
"It's a tradeoff," he said. Giving up some corporate tax breaks "in exchange for more reasonable tax rates is a noble cause. A more reasonable tax rate makes the US more competitive."
Back in the KPMG panel, David Brockway, who served on the staff of the Joint Committee on Taxation from 1983 to 1987 and is now a partner at Bingham McCutchen LLP, said he was skeptical about the political feasibility of the stated goal of reducing tax rates while controlling the deficit. "I don't think there's anybody out there talking about (tax reform) as a means of raising revenue.
"If you can't do it on a revenue-neutral basis how can you do is on a revenue-raising basis," he said, adding that reducing the corporate tax rate is "something the general public doesn't care about and is not going to care about."
Quipped panelist John L. Buckley, a Georgetown University law professor who was the Ways and Means Committee's chief tax counsel until 2010: "There's a reason why the people who propose these radical changes aren't elected officials."
For his part, Sowers Machinery's Van Voorhis says he's adopting a wait-and-see attitude.
"Given a long enough transition period, we could adjust," he said. "If Washington could reinvest and do the things they need to do that could make it worthwhile."