Want a Lower Corporate Tax Rate? Not So Fast

16.03.2011
The idea of reducing nominal corporate tax rates may seem a no-brainer in terms of the benefits to be reaped by the U.S. business community. The catch, of course, is paying for this reduction at a time of rising federal deficits.

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.