President Obama’s Tax Reform

In February 2012, the White House and the Department of the Treasury issued “The President’s Framework for Business Tax Reform.” The Framework is a proposal for reform of the business tax system.

These are uncertain times for tax legislation. Any type of tax reform will end with winners and losers as with the Tax Reform Act 1986.

The main reason for the Framework is that tax reform is required because the United States has a narrow tax base when compared to other countries because of reductions by loopholes.  Tax expenditures and tax planning will soon be a priority for businesses. The U.S. tax system is uncompetitive and inefficient compared to other countries because it distorts choices on where to produce, in what to invest, how to finance and what business entity form to use. Right now, the tax system favors decision making against U.S. job creation and investment to let businesses benefit from foreign incentives and profit shifting strategies. For an international company, there may be intercompany agreements to shift revenues to subsidiaries or affiliates set up in other countries to save on taxes.

In the U.S., tax expenditures and loopholes make it necessary for there to be numerous complex rules to restrict the benefits of tax savings to the intended beneficiaries, placing a compliance burden on taxpayers, in time and expense. The U.S. tax system may be too complicated for small businesses.

The Framework reform is meant to lower corporate rates from 35% to 28%, reduce tax expenditures such as interest deductions attributed to corporate-owned life insurance policies and loopholes such as Last in first out (LIFO) accounting, and increase incentives to invest and hire the unemployed in the U.S.  The Framework reform also intends to provide disincentives for U.S. companies to invest and hire overseas where the labor may be cheaper. In the U.S., some companies may prefer to engage independent contractors or hire people only as temporary workers because the employment costs in benefits and salaries are so high compared to the labor and tax savings that can be obtained abroad.

To stay up to date on tax reforms, consult with an experienced New York tax attorney.