Lost in the fog of budget battles and fights over massive new spending programs is the need on the federal level for tax reform and simplification. Businesses—especially small businesses—are hampered by a complex tax code that has reduced the competitiveness of the American economy.
Instead of reducing taxes or simplifying the code, the Obama administration’s budget has raised the individual rates of taxation, raised dividend and capital gains taxes, and has disguised some spending increases as tax cuts. Republicans are poised to make real reforms possible.
In a recent House Ways and Means subcommittee hearing titled Small Business and Tax Reform, there was a strong push by witnesses testifying to make changes to the tax code in order to fit the reality of the globalized and competitive economy. Making it easier for small businesses to operate and thrive was also a top priority of the committee members and panelists.
The problem with the current system was apparent. For one, the U.S. now leads the world in a dubious category: highest corporate taxes in the world. Another problem is that while the U.S. has the greatest number of options for business formation in the world, many complex rules apply to each one of those business types. For large businesses this is not as problematic, because they can hire many financial assistants to help with tax filing. According to the IRS, the cost of tax compliance for a very small business generally amounts to around 15% to 18% of total revenues. This is a serious misallocation of capital that damages the competitiveness of U.S. businesses.
On top of the complexity, the uncertainty about future policies causes problems for all kinds of businesses. In the past, companies could plan many years in advance for future investments and hiring. This has changed since the 1980s, and there are now frequent changes that make future planning impossible. Obvious evidence of this was how in 2010 the Obama administration and Democratic-led Congress vacillated about the continuation of the Bush tax reductions of 2001. The witnesses remarked how much frustration this had caused for businesses throughout the country.
The witnesses recommended that the U.S. federal government undergo tax reform and had a number of suggestions for doing this. Patricia Thompson, a CPA, argued for simplifying the rules for depreciation. The panel discussed changing the e-filing process that normally forces a business to submit multiple times for some part-time employees, and perhaps most importantly, to stop what the Lake Erie Electric Chief Financial Officer Tim Tarnay called “the leveling plague.” The general recommendations were to lower the rates to avoid tax evasion and broaden the base to make revenues stable.
For the most part, the recommendation was a complete overhaul of the U.S. tax code all at one time. Along with entitlement reform and debt reduction, a tax code overhaul could be a major boost to businesses across the U.S. and could dramatically help the economy in the long term.
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