Both President Obama and the GOP presidential candidates have recently released their corporate tax plans for the future. Many of these plans call for changes in the corporate tax rate, changes in corporate tax preferences and changes to the repatriation of corporate profits in the US with a focus on increasing domestic manufacturing, increasing international competitiveness and incentivizing small business. As we look to the future, from a tax planning perspective, we compared the plans of the White House to the plans of Mitt Romney, Rick Santorum and Newt Gingrich. Here is a brief summary of what we found:
Corporate Tax Rate
In order to make the US more economically competitive with other parts of the world, President Obama is proposing a reduction in the top corporate statutory income tax rate from its current 35% to a lower 28% rate.To offset the rate reduction, the President calls for the elimination of many tax expenditures, especially those in certain industries.The President would disallow the use of the Last in First Out inventory valuation methodology. He would eliminate tax preferences for fossil fuels such as expensing intangible drilling costs and percentage depletion for oil and natural gas wells. He also calls for the tightening up of rules for corporate owned life insurance. The President would subject Income from carried interest (i.e. alternative investment profits) to ordinary income tax rates instead of capital gains rates. Lastly, the President proposes to increase the depreciation recovery period for general aviation airplanes that carry passengers, from five years to seven years.
Mitt Romney believes that reducing and stabilizing federal spending is essential, but breathing life into the present anemic recovery will also require fixing the nation's tax code to focus on jobs and growth. To repair the nation's tax code, marginal rates must be brought down to stimulate entrepreneurship, job creation, and investment, while still raising the revenue needed to fund a smaller, smarter, simpler government. The principle of fairness must be preserved in federal tax and spending policy. Mitt Romney is proposing to reduce the corporate tax rate from 35% to 25%. He is also proposing a repeal of corporate Alternative Minimum Tax.
Rick Santorum is committed to reviving our economy, restoring economic growth, and creating jobs in America again by unleashing innovation and entrepreneurship through lower and simpler taxes for American businesses, workers, and families. He also will roll back job killing regulations, restrain our spending by living within our means, and unleash our domestic manufacturing and energy potential. Rick Santorum is proposing to cut the corporate tax rate in half to 17.5% and reduce it to 0% for manufacturers.
Newt Gingrich believes that America only works when Americans are working. Newt has a pro-growth strategy, similar to the proven policies used when he was Speaker of the House, to balance the budget, pay down the debt, and create jobs. Newt Gingrich is proposing to reduce the corporate tax rate to 25%.
President Obama wants the tax code to incentivize domestic manufacturing. The President wants to effectively cut the top corporate tax rate on manufacturing income from 35% to 25% and even lower for income from "advanced" manufacturing activities. Advanced manufacturing activities would be allowed a larger deduction, although the rate is not specified.
Mitt Romney would create a temporary investment tax credit and extend expensing of capital expenditures for one year. He would also like to make the research and development tax credit permanent. Mitt Romney is proposing to couple further rate reductions with base broadening and simplification. However, Romney has not defined these further rate reductions or how he would increase the tax base.
Rick Santorum would increase the R&D credit from 14% to 20% and make it permanent as well as allow 100% expensing of equipment.
Newt Gingrich would allow full expensing of capital expenditures (equipment and infrastructure).
President Obama has been reluctant to embrace a territorial system of taxation. A territorial system would exempt foreign income of U.S. multinational firms from taxation. The President prefers to strengthen the current system to combat what it sees as incentives to shift income outside the United States. The President makes it clear that the administration believes a territorial system would "aggravate, rather than ameliorate, many of the problems in the current tax code". Instead, he proposes tightening the current worldwide system, mostly by curtailing deferral of U.S. taxation on un-repatriated income.
The President proposes setting a minimum rate of tax for income earned offshore by the subsidiaries of U.S. companies. Furthermore, foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country. However, the President does not specify what the President thinks this minimum rate of tax should be. The President would also disallow deductions for expenses related to moving operations offshore and providing a 20 percent credit for returning operations to the United States. The President would also tax excess profits associated with shifting intangibles to low-tax jurisdictions, and deferring interest deductions for expenses attributable to foreign-source income until that income is subject to U.S. tax.
Mitt Romney would like to change to a territorial system of taxation. Such a system could enhance the competitiveness of U.S. firms in low-tax countries, potentially increasing the external benefits associated with multinationals' activity in the United States. Romney is proposing a tax holiday (i.e. zero tax) when it comes to repatriation of corporate profits. However, the plan does not specify the length of the holiday, or whether repatriated earnings would face any tax and, if so, at what rate.
Rick Santorum would like to eliminate the tax on repatriated corporate income if used to invest in plant and equipment. He would tax other repatriated profits at a 5.25% rate.
Newt Gingrich would also like to move to a territorial system of taxation.
President Obama believes that tax code complexity is unduly burdensome on small businesses. To reduce complexity and make up for any pain from the loss of expenditures, the President offers two reform proposals. First, the President wants to make bonus depreciation permanent for small businesses by allowing them to expense 100 percent of qualified investments up to $1 million. Next, the President proposes increasing the threshold for small businesses to use the cash method of accounting from $5 million in gross assets to $10 million. The President also calls on Congress to enact recent budget proposals, such as doubling the deduction for start-up costs and expanding the health insurance tax credit for small businesses.
Both the President and the GOP candidates would like to stimulate the economy, create jobs and increase the US competitiveness in the world market. As a result, all are calling for changes in the corporate tax rate, changes in corporate tax preferences and changes to the repatriation of corporate profits in the US with a focus on increasing domestic manufacturing, increasing international competitiveness and incentivizing small business. Although it is unclear when these changes could be implemented, given the current state of the economy and the federal government's financial position, it appears that changes in the areas listed above, could occur in the near future.