Old Tax Rewrite Idea Deserves New Look, Business Group Says
Published in Bloomberg BNA Daily Tax Report
By Marc Heller
April 29 — Lawmakers weighing broad changes to the U.S. tax code should take a fresh look at a proposal from a previous administration, according to a new report.
The American Council for Capital Formation, in a report to be released April 30, promotes a 2005 proposal by President George W. Bush’s Advisory Panel on Federal Tax Reform and takes aim at more current efforts to revamp the tax code by repealing tax expenditures and broadening the tax base.
The report, prepared by EY, found that the Bush advisory panel’s plan would shrink business’s cost of capital, while the recommendations of the Obama administration’s National Commission on Fiscal Responsibility and Reform—proposed in 2010 and still shaping tax-overhaul ideas in Congress—would increase the cost of capital, especially for utilities, computer manufacturers and chemical manufacturers.
Overall, the study found, the capital cost for new investment would rise from 5.4 percent to 5.6 percent under the plan recommended by the commission, also known as the Bowles-Simpson commission, named after its chairmen, Alan Simpson and Erskine Bowles.
The earlier plan, sometimes referred to as the Growth and Investment Tax Plan, would trim cost of capital to 4.3 percent, according to the report.
The report examines effects across industries. In construction, for instance, cost of capital falls from 6.3 percent in current law to 6.1 percent in the commission’s approach; under the advisory panel’s plan, it would fall to 4.3 percent—a 32 percent reduction.
The study bolsters the ACCF’s view that any tax overhaul based on the Bowles-Simpson approach is flawed because of the added cost of new business investment. In a caveat, the report says evaluating tax policy based on cost of capital doesn’t take into account the effect of taxes on above-normal returns or economic profits, and may bear little resemblance to the overall burden of the tax system.
And because the analysis doesn’t account for foreign-source income, it applies to U.S. domestic-only businesses, the report said.
Although Congress has embraced neither tax proposal in its entirety, most of the tax overhaul proposals floated by Republicans and Democrats alike follow the commission’s outline by broadening tax base and eliminating tax credits and deductions, while cutting tax rates, a spokeswoman for the group told Bloomberg BNA.
The ACCF’s approach contrasts with that of corporations such as AT& T Inc., Boeing Co. and Wal-Mart Stores Inc., which have said they are willing to forgo tax credits and deductions to achieve top corporate tax rates as low as 25 percent.
“The immediate deductibility of investment encourages investment by removing the tax from an economically important part of an investments return,” the report said.
The plan from 2005 would institute a new 30 percent business cash flow tax and includes an immediate deduction for all new investment.