February 22, 2012
President Obama's Framework for Business Tax Reform Released
Today, Secretary of the Treasury Tim Geithner released a joint report by the White House and the Treasury Department focused on a framework for business tax reform (the Framework). The Framework makes the case that business taxation in the U.S. is in need of reform to make it more competitive, to increase its efficiency and to end the distortion of choices made by taxpayers as to "where to produce, what to invest in, how to finance a business and what business form to use."
With respect to the elimination of "distortions" of choice in the tax system, the Framework identifies four central issues: 1) distorting the form of investment by industry and asset type, e.g., through differing depreciation and capital recovery allowances; 2) distorting the financing of investment, e.g., through the deductibility of interest; 3) distorting the form of business, e.g., through the differing treatment of C-corporations and so-called "pass-through entities" (the examples provided are S-corporations, partnerships and sole-proprietorships); and, 4) distorting the investment decision on the basis of geography, e.g., through the decision to shift production and profits overseas.
In keeping with the objectives mentioned above, the Framework identifies five essential elements of business tax reform. They are: 1) elimination of dozens of largely unidentified tax "expenditures" to broaden the tax base and to cut the corporate tax rate to 28% (25% for manufacturing); 2)encouragement of manufacturing, research and development, and clean energy through tax "expenditures;" 3) strengthening of the international tax system, in part by establishing a minimum tax on foreign earnings; 4) simplification of taxes for small businesses; and, 5) avoidance of any increase to the deficit, in part by the elimination of now temporary tax provisions or by making permanent others which will be "paid for" in some fashion.
The Framework lays out a "menu of options" without endorsing specific proposals for accomplishing its goals, including changing the deductibility of interest expense, modifying depreciation deductions to more closely match economic depreciation, conforming more closely book and tax accounting, and establishing greater parity between large corporations and large non-corporate counterparts.
The Framework does specifically propose a limited number of tax changes, including those items already contained in the Administration’s FY 2013 Budget Proposal , such as those affecting last-in, first-out accounting; special depreciation for corporate aircraft purchases; and the treatment of carried (profits) interest.
The Framework does not address REITs specifically or real estate investment more generally.
Given the Congressional schedule and the upcoming November 2012 elections, little activity (other than hearings) is anticipated as a result of the Framework for most of this year. More serious consideration may be given to the Framework in the aftermath of the election or in 2013.
Consistent with ongoing practice, NAREIT will conduct an informational dialogue with relevant policymakers with respect to these matters as developments warrant.
For further information, or if you would like to participate in NAREIT's tax policy activities, please contact Tony Edwards at firstname.lastname@example.org.