Daily Tax Update - March 6, 2012: Finance Hearing: Tax Reform Options: Incentives for Capital Investment and Manufacturing

FINANCE HEARING: TAX REFORM OPTIONS: INCENTIVES FOR CAPITAL INVESTMENT AND MANUFACTURING:  Today, the Senate Finance Committee continued its series of hearings on tax reform.  The witnesses examined the current incentives in the tax code for capital investment and manufacturing and their contributions to job creation and economic growth.

  • The hearing witnesses were:
    • Dr. Jane G. Gravelle, Senior Specialist in Economic Policy, Congressional Research Service, Library of Congress, Washington, DC
    • Dr. Ike Brannon, Director of Economic Policy & Congressional Relations, American Action Forum, Washington, DC
    • Dr. Robert D. Atkinson, President, Information Technology and Innovation Foundation, Washington, DC
    • Dr. J.D. Foster, Norman B. Ture Senior Fellow, Economics of Fiscal Policy, The Heritage Foundation, Washington, DC
    • Dr. Michelle Hanlon, Associate Professor of Accounting, Sloan School of Management, MIT, Cambridge, MA
  • In his opening remarks, Committee Chairman Max Baucus stated, "Today we will ask whether these policies are working to encourage broad-based economic growth and job creation.  Do they spur investment in the US economy?  And are they more effective than a rate reduction with the same cost? . . . . We need to determine whether the current incentives adequately address the existing challenges or whether there are simpler, more effective ways to encourage manufacturing investment in the US."
  • Dr. Gravelle testified: "Although much attention has focused on statutory tax rates and how they compare to tax rates in other countries, tax burdens on investment are also influenced by provisions that affect the business income tax base.  These tax base provisions along with preferential rates lead to differences between statutory and effective tax rates. . . Thus, rules for measuring the tax base, as well as the rate, affects the tax burdens on corporate investments.  This is the central issue in any tax reform, including one that is revenue neutral: the need to balance rate reductions and base broadening."
  • Dr. Brannon stated: "Economic growth should have primacy in any debate over corporate tax reform.  Most of the deductions, exemptions, and expenditures in the tax code do relatively little to incentivize growth given their cost, and our economy—and government coffers—would be better off if they were eliminated and the savings were used to 'buy' a lower corporate tax rate.  The one possible caveat to that is that if it is politically feasible, the full and immediate expensing of capital equipment would remove a major source of arbitrariness from the tax code, which would increase investment and also be consistent with the desire to make the corporate tax code more neutral. Americans—from homeowners to small businesspeople to the millions of unemployed—are in desperate need of faster and prolonged economic growth.  Congress should therefore move away from ephemeral and ineffective short term stimulus proposals and evaluate tax proposals based on whether they’re likely to trigger and support that growth.  Tax policy can play a key role in spurring an economic recovery—but not without sustained reform of the corporate tax system."
  • Dr. Atkinson stated, "As you consider corporate tax reform, it is important to distinguish between tax incentives that are pro-growth and those that are not.  Not all tax 'distortions' are harmful to growth.  In fact, some are solidly pro-growth and if efforts to reform the corporate tax code eliminate these incentives in the effort to achieve rate reduction, US economic growth and competitiveness will suffer.  Thus effective corporate tax reform means retaining and even expanding pro-growth incentives."
  • Dr. Foster testified: "In light of the ongoing high unemployment, policymakers should be keenly focused on what they can do to help the economy recover, but they must also recognize the limitations of policy initiatives.  Tax gimmicks are of value only in slaking politicians’ natural desire to be seen as doing something.  Even fundamental tax reforms can be problematic if they are not well-defined from the outset.  Though it may require a difficult discipline to implement, government’s guiding principle today should be:  Do less harm."
  • Dr. Hanlon stated: "The main point of the above testimony is that financial accounting effects can act to mitigate or strengthen incentives provided by the tax code.  That is, financial accounting effects have the potential to blunt the intended incentive effects of policies designed to lower the effective US corporate tax rate and they have the potential to lead to unintended consequences.  Studies have shown that 'taxes matter' in the sense that the timing of investment is altered as a result of bonus depreciation provisions, but the evidence that aggregate investment is responsive is very mixed."  Dr. Hanlon added, "In sum, financial accounting effects can affect responsiveness to tax policies.  Thus, financial accounting implications and the related incentives for managers should be considered when writing tax policy in order to maximize responsiveness and correctly score provisions.  However, in my opinion, the fact that some firms with deferred tax assets would have to write-down the value of those assets if corporate rates are reduced should not stop the US from lowering the corporate tax rate.  Even this sub-set of companies will benefit in the future from lower rates, assuming these companies become profitable."
  • Testimony can be accessed here.
  • The Joint Committee on Taxation has issued a report in conjunction with today’s hearing. 
  • For additional information, contact Philip R. West - pwest@steptoe.com or Amanda Varma - avarma@steptoe.com

OBAMA URGES CONGRESS TO PASS BUFFETT RULE:  Today, in a press conference, President Obama urged Congress to end tax breaks for companies shipping jobs overseas and to vote on the Buffett Rule.  The President said, "Now, Congress did the right thing when they passed part of my jobs plan and prevented a tax hike on 160 million working Americans this year.  And that was a good first step.  But it’s not enough.  They can’t just stop there and wait for the next election to come around.  There are a few things they can do right now that could make a real difference in people’s lives.  This Congress should, once and for all, end tax breaks for companies that are shipping jobs overseas, and use that money to reward companies that are creating jobs here in the United States.  I’ve put forward a proposal that does just that, and there’s no reason why Congress can't come together and start acting on it.  This Congress could hold a vote on the Buffett Rule so that we don’t have billionaires paying a lower tax rate than their secretaries.  That’s just common sense.  The vast majority of Americans believe it’s common sense.  And if we’re serious about paying down our deficit, it’s as good a place to start as any."

MISCELLANEOUS GUIDANCE RELEASED:

Notice 2012-24 provides guidance as to the corporate bond weighted average interest rate and the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue Code as in effect for plan years beginning before 2008. It also provides guidance on the corporate bond monthly yield curve (and the corresponding spot segment rates), and the 24-month average segment rates under § 430(h)(2). In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008, the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), and the minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning after 2007.

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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