Is Tax Reform Ahead in 2011? Our Expert Weighs In
David Kautter was recently named executive-in-residence and managing director of the Kogod Tax Center, a newly launched research institute that will focus on tax issues that address the needs of small businesses, entrepreneurs and middle income taxpayers.
Until recently, Kautter served as Director of National Tax at Ernst & Young, managing the strategic direction and day-to-day operations of more than 1500 professionals in over 60 US and global locations. Here he discusses the possibility of significant tax reform in 2011 and tax provisions in the president's FY2012 budget.
During his State of the Union Address, the president said, "the best thing we could do on taxes for all Americans is to simplify the individual tax code." Do you agree with his take?
The last time our tax code was simplified for individuals was 1986. In the 25 years since then, our tax laws have become more complicated by the day. The number of deductions, exclusions, exemptions and credits is truly baffling, even for taxpayers who file relatively simple returns. The arguments for eliminating a lot of those provisions, broadening the base—which essentially increases the amount of income subject to tax—and lowering overall tax rates are very compelling.
The president just released his budget for 2012. What does it propose in terms of tax reform?
There aren't many specific tax reform proposals in the budget. It seems the President has left the next major move up to Congress. Fortunately, there's been some movement on Capitol Hill. On February 2, the Senate Budget Committee held a hearing to discuss tax reform as "a necessary component for restoring fiscal responsibility." The House Ways and Means Committee launched a series of hearings on fundamental tax reform in late January, and the Senate Finance Committee is planning a similar series starting March. So there is momentum to at least get the conversation started.
Given tax reform is such a complex and time-consuming process, where should Congress begin?
It looks as though the conversation will begin with corporate tax reform, which is a great place to start. The United States has the second highest corporate tax rate in the developed world, second only to Japan, which has plans to cut its corporate rate in April. Our rate means that doing business in the US is more expensive, and corporations have a major incentive to move off shore. As a result, we lose our competitive advantage, we lose jobs, and our economy slows down. But right now, there's some significant support across the political spectrum for overhauling our corporate tax system. Hopefully we'll see some real progress.
Does the Administration's budget propose lowering corporate rates?
No, the budget doesn't include a specific plan for corporate tax reform. But the Treasury Secretary has suggested the Administration will likely offer a tax reform outline later this year, and that it will shoot for something that can capture real bipartisan support.
Does corporate tax reform impact small businesses?
Most small businesses are not structured as corporations. They operate as sole proprietors or as partnerships and are taxed at individual tax rates. If we eliminate business deductions for all businesses, including those that are not corporations, and only reduce corporate tax rates, we could hurt a lot of smaller businesses on main street in the process.
For example, if a sole proprietor operating a flower shop has been taking advantage of accelerated depreciation deductions to reduce their income subject to tax, and that deduction is eliminated as a way to pay for reducing the corporate tax rate, the sole proprietor’s tax will go up unless the individual income tax rates that apply to their business income are also reduced. We've got to ensure corporate tax reform isn’t debated in a vacuum, but takes into account those businesses that operate in an unincorporated form.
There's been much discussion recently around supporting small business innovation and entrepreneurship as a means to spur job creation. Does tax reform have a role to play in those efforts?
Small businesses work on a much sharper profit margin, and certainly have less time to focus on paperwork. The more time small business owners and start-ups have to focus on tax rules and regulations—many of which are constantly changing—the less time they have to focus on building a stronger, more innovative business.
The Kogod Tax Center has just launched. What are your plans for the coming months?
I'm thrilled to be getting the Tax Center up and running. In terms of expertise in taxation, there's no better place to be beginning this work than Kogod. In the coming months, we'll be working to highlight the needs of small business owners and middle-income taxpayers within the broader policy dialogue tax reform.