- - Tuesday, March 19, 2013


We avoided the “fiscal cliff” — for now. Sequestration is upon us. The next looming opportunity for a fight between Congress and President Obama over taxing and spending is March 27, when current fiscal year funding for federal government operations ends. Will that be the moment when our elected officials finally get serious about corporate tax reform?

To prevent a government shutdown starting March 28, Congress will need to approve a new funding measure. The media will likely focus on another battle between Republicans and Democrats, conservatives and liberals. Meanwhile, the business community, trying to make decisions on hiring and investment, must cool its heels waiting for the next climax.

To improve the hiring and investment climate, Congress must focus on producing legislation that jump-starts tax reform. Both the president and Congress have created an environment of extreme tax-policy uncertainty. It’s confounding enough that much of the tax code is temporary and must be renewed every year. Congress has also been allowing more and more time to pass each year before extending many of these tax provisions. Companies and individuals now bounce from year to year on the assumption that the tax law will be renewed and the laws relevant to them will be continued. That is an unnecessary burden for everyone, especially employers who are looking for more certainty in the tax laws before hiring and investing.

The legislation Mr. Obama signed on Jan. 2 to avoid the “fiscal cliff” — a series of spending cuts and broad tax increases — extended about 42 expired or expiring temporary business tax provisions, commonly referred to as “extenders,” through 2013. These extensions included business-related extenders such as research credits, bonus depreciation and small business expensing. In many cases the uncertainty is compounded for companies that reside in states coupled to federal tax law.

Business groups and academic researchers have all pointed out the impact our unstable corporate tax code has on companies. In 2012 the National Federation of Independent Business produced a survey that ranked 75 issues of concern for small businesses. Federal tax issues are among the top items on the list.

Many of the rules regarding international business, such as taxation of offshore profits, have been in place since the early 1960s when the United States was a low-tax jurisdiction compared to the rest of the world. We chose not to tax companies at home if they were taxed abroad, unless they located in countries where the tax rate was much lower than the U.S. rate. Today, the corporate tax rate in virtually every country is well below the United States, so it looks as though companies are shifting profits out of the country wherever they operate. U.S. corporate tax reform could level the playing field.

A paper entitled “The Economic Costs of Tax Policy Uncertainty,” published by George Mason University late last year, stated that tax policy uncertainty itself has negative implications for the economy by reducing investment, consumption, employment and growth, and possibly prolonging a weak recovery.

The report noted that because tax policy uncertainty suggests the government is open to policy change, it encourages interested parties to spend more money on lobbying efforts to secure special policy treatment. Such lobbying shifts resources away from economically productive activities and toward those that are not economically productive.

The paper also made an interesting comparison to the Tax Reform Act of 1986, which closed loopholes, broadened the tax base and lowered rates. Studies have shown that tax reform reduced economic inefficiencies, and that it laid the foundation for the United States’ strong economy during the remainder of the 1980s and the 1990s. Yet here’s an amazing statistic: In the 20 years following the signing of the Act, Congress amended the tax code approximately 15,000 times. As the authors point out, “That’s more than twice a day, including weekends.”

Leaders of the House and Senate tax writing committees indicated throughout 2012 that the days of routine extension of expiring tax provisions may be coming to an end. If that is the case, let us hope it is done through comprehensive tax reform that wrings out as much uncertainty as possible and enables our businesses to confidently invest and expand.

Douglas Stransky is a U.S. international tax partner at the law firm of Sullivan & Worcester LLP.

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