Capital Corner:  Will Tax Changes Blossom Soon?

Jim Brandenburg, CPA, MST, Shareholder - Tax   email | bio
May 2011

If the old adage follows that April showers will bring May flowers, then we should have plenty of beautiful flowers this spring. In Washington, Congress is being showered with tax proposals to overhaul the federal budget and to address the growing deficit. Will any of these tax proposals take seed, grow and blossom into full-flowering tax changes?  

Politicians from all parties and perspectives seem inclined to rein in federal spending. The uncertainty lies in which spending programs to "cut" and by how much. (Remember, a cut in Washington sometimes means a smaller increase.)  Will only discretionary spending be cut, or will entitlement (nondiscretionary) spending also be curtailed? This is where the consensus falls apart. On the tax front, many reform proposals are also being considered, but there appears to be little agreement on tax reform changes. Below are several key tax reform efforts being tossed around and the near-term prospects for enactment. 

• Corporate Tax Reform.  Much has been talked about, but don't look for higher taxes to be imposed soon on corporations. Washington sees that the U.S. corporate tax rate of 35 percent is one of the highest in the world, and any increase might further deter companies from expanding within or moving to the U.S. In fact, there may be more support in Washington to cut the corporate tax rate than to increase it, although this is uncertain. At this point, look for lots of talk and little overall change.

• Individual Tax Reform. This area has also seen a garden of ideas from raising taxes across the board, to only raising taxes on the "wealthy," to cutting tax rates across the board. The Bush Tax Cuts that were extended at the end of 2010 through 2012 will be highlighted as an area to raise tax rates by not extending these cuts beyond 2012. Many in Washington are aware that these individual rates are the tax rates paid by small businesses, and small businesses generate significant job growth and economic development. Thus, this area will also see much discussion and political rhetoric but don't look for any major changes here.

• VAT.  If the corporate and individual tax rates are not reformed or increased, will Congress look for another branch to raise revenue? The VAT, or Value Added Tax, exists in Europe and other parts of the world.  Essentially, it is a consumption type tax that is assessed at each step of a production process of a product (although as the product moves along this process some of the VAT is refunded). Ultimately, the end-consumer or user pays this tax.  In some ways it is like a sales tax.  No formal proposals have been introduced yet, but this may surface over the coming months. If the VAT was adopted, would other taxes (corporate and/or individual taxes) be reduced? It is unclear at this point. There does not seem to be a groundswell of support for imposing such an entirely new tax regime on businesses.    

• Short-term tax proposals. Other tax proposals may spring up such as trying to deal with the high price of gas by imposing higher taxes on oil companies, but these may be designed more to provide political cover than to have any material impact on fuel prices. 

 The year 2012 is not too far off.  Politicians will keep this in mind as they move ahead with any tax proposals. Look for continued talk, but few changes. Stay tuned, and enjoy springtime in Wisconsin...