Zerbe: Principles to Reform Taxes, Help Businesses
Republican presidential candidate Herman Cain’s call for dramatic tax reform has been a big part of his recent rise in the polls as well as his being named captain of the javelin-receiving team in the Republican debates.
There has been a great deal of ink spilled lambasting Cain’s proposal on a variety of fronts, including lowering the tax burden on the well-off, increasing the tax burden for the lower and middle class, and introducing two new systems of federal tax (sales tax and a new business tax) — with fears that the rates could be increased (something that of course could never happen under the current tax code).
Whatever your views on the 9-9-9 tax plan, credit Cain for putting the issue of tax reform front and center. The popularity of his proposals among Republican primary voters is already forcing Texas Gov. Rick Perry to put forward his own tax reform proposal — a flat tax similar to that championed by Steve Forbes. Perhaps we can even hope to see the Obama administration’s secret white paper on tax reform.
As Congress, the administration and Republican presidential nominees sharpen their pencils on tax reform, here are seven principles that will benefit small and medium businesses (as well as help create jobs and grow the economy):
1. Tax reform for businesses must benefit all business, not just the Fortune 500 companies. Too many people in Washington have a Pavlovian response to the words “tax reform” — spitting out the mantra of eliminating credits and incentives and lowering the corporate tax rates. Such a response ignores the reality that about 93 percent of businesses are organized as pass-through entities, not C corporations. Thus, the effect of such a “reform” would mean that small and medium businesses would see an increase in taxes (from the elimination of credits and incentives from which they also benefit) with the money being used to lower the tax bill for the Fortune 500. Terrific. House Ways and Means Chairman Dave Camp (R-Mich.) is right when he states that we need to have business tax reform, not just C corporation reform.
2. Ensure that small and medium businesses can take equal advantage as large corporations when it comes to credits, deductions and incentives for business. Current tax policy effectively bars thousands of small and medium businesses from taking dozens of tax credits created by Congress for business. The tax code prevents business owners from using tax credits to reduce their alternative minimum tax. Congress eliminated for one year this nonsensical AMT barrier for small and medium businesses taking credits in the Small Business Jobs Act of 2010. Congress needs to make the change permanent now.
3. Greater certainty in the tax laws would be of significant benefit to small and medium businesses. These business owners have enough to do without trying to keep up with dozens of annual changes in tax laws.
4. Simplification of the tax laws would also be most welcome to small and medium business owners as well as their accountants. These businesses pay a higher cost (as percentage) for tax compliance than the largest corporations. In my discussions with business owners and their accountants across the country, I have been taken aback by how often some tax proposals — even tax proposals designed to benefit small business — are dismissed out of hand as being useless because the provision is so complicated.
5. Improve taxpayer rights for small-business owners. It is Pollyannaish to believe that even the most far-reaching tax reform would mean the elimination of the IRS. The creation of a fair tax, a flat tax or a value-added tax will not suspend the rules of human nature when it comes to people embracing the idea of writing a big check to the government. Congress has done a good job in recent years of improving the rights of individual taxpayers before the IRS. Tax reform should similarly provide a more balanced relationship between small-business owners and the IRS.
6. For purposes of long-term economic growth, we need to continue to encourage innovation. As the work of Nobel Prize-winning economist Robert Solow has shown, more than 85 percent of economic growth comes from innovation — applying research and development. A number of Organisation for Economic Co-operation and Development countries have shown that it is possible to have lower business tax rates and at the same time also have a robust research and development tax credit.
7. The tax code needs to encourage investment in new business. It is new business that is a particular strength for job creation as well as innovation.
Keeping in mind these seven principles when considering tax reform will go far in ensuring that such reform benefits small and medium businesses — the core of our nation’s economy.
Dean Zerbe is national managing director of alliantgroup, a provider of specialty tax services.