Making taxes competitive and enhancing to economic growth
I was on an international flight returning home to Grand Rapids recently when I pondered our U.S. history and how some items have changed and others have not. The experiences, insight and values of our forefathers can often assist us in dealing with issues that confront us.
Benjamin Franklin is quoted as saying, “In this world, nothing can be said to be certain except death and taxes.” There is much truth in that statement. The Boston Tea Party was in response to the Tea Act passed by the British Parliament. The comment “no taxation without representation” arose during this period.
Fast forward more than 240 years, and taxes are still an issue in daily discourse in Washington and beyond. Tax policy is often debated with passionate opinions on how, when, whom and how much to tax.
In recent weeks we have seen several actions taken with respect to taxes. The U.S. Treasury Department issued guidance Sept. 22 regarding future regulations to limit the use of inversions and post-inversion tax planning.
In October, the Irish Minister for Finance announced changes to Irish taxation rules with respect to Irish non-resident companies that are often used in the so called “Double Irish” structures. These structures have been widely reported in the past two or three years and have been the subject of governmental hearings in both the U.K. and the U.S. The announcement indicated the changes will be phased out for any existing structures by Dec. 31, 2020, and no new structures will be permitted after 2014.
These two actions in the U.S. and Ireland were in response to legal tax planning situations some felt were abusive. The changes come at the same time as the Base Erosion and Profit Shifting discussion and the discussion in the U.S. for corporate tax reform. Many in Washington are in agreement that corporate tax reform is long overdue and the U.S tax code is not competitive with its trading partners. Actual legislative action on that front is unlikely in 2014 and, depending on what happens with the upcoming elections, it remains to be seen what will occur with the 2015-2016 Congressional legislative session in Washington.
However, some action may be forthcoming on a number of tax provisions that expired at the end of 2013 and others that will expire in 2014.
According to a Joint Committee on Taxation List of Expiring Tax Provisions 2013-2023 issued in January 2013, 55 tax provisions were scheduled to expire at the end of 2013 and another six expire in 2014. To date, these provisions have not been renewed, but many expect most will be. We have seen this drama play out in the past, most recently with respect to the fiscal cliff debate and New Year’s Eve session of Congress that resulted in extension of many tax provisions in the early hours of 2013 for tax years 2012 and 2013.
The provisions that have expired or will expire cover a variety of areas. A number of them deal with energy-related tax credits. Given the emphasis of looking at alternative energy, it is surprising such credits have a limited life and need to be renewed.
One of the most significant items that has expired and most expect to be renewed is the research and experimentation credit. In a competitive and technology-focused economy, many find it surprising that the research credit isn’t a permanent fixture of our tax code. Most of our trading partners have defined and permanent provisions in their tax codes or acts that provide for research credits and other research incentives. In addition, the U.K. has enacted a tax-friendly patent box regime, and Ireland recently announced it will do something similar in an effort to attract investment and top research and engineering professionals to their jurisdiction.
A number of other provisions deal with depreciation. We have seen most of the favorable depreciation incentives, in some form, since 2001. This includes provisions dealing with bonus first-year depreciation for certain capital expenditures as well as provisions that provide shorter depreciation lives for leasehold improvement, race tracks, race horses and biofuel plant property. The conventional wisdom is that such depreciation incentives create additional jobs in companies that manufacture the property and equipment, as well as employment at companies that use the property and equipment.
Many employment tax credits expired at the end of 2013. As with the depreciation allowances, the use of employment credits is thought to incent businesses to hire certain groups of employees. With the political discourse on the need to create jobs, one would expect there is no large opposition for renewing these credits.
All of the provisions above are essentially temporary as they have sunset dates. There has been discussion in making many of these permanent fixtures in the tax code. There is precedent for doing this and avoiding the fire drill that often comes after tax provisions have expired and need to be renewed. Nearly two years ago, the taxation of qualified dividends at long-term capital gains tax rates was made a permanent part of the tax code.
Many of these provisions have been in the tax code for years, yet an expiration or sunset date is attached because the politics of Washington doesn’t allow or members of Congress won’t commit to clear, certain and permanent tax policy. The common opinion is that uncertainty in taxes often causes distortion in the economy by impacting the timing and amount of capital and business expansion decisions. This uncertainty can impact the growth of a business and the nation’s economy.
In the age of our founding fathers, there were some dark days during the American Revolution. The winter of Valley Forge ultimately became the spring of freedom and a new nation. In the end, perhaps taxes won’t only be certain, but competitive and enhancing to economic growth.
Bill Roth is a tax partner with the local office of international accounting firm BDO USA LLP. The views expressed are those of the author and not necessarily of BDO. The comments are general and not to be considered specific tax or accounting advice. Readers are advised to consult their professional advisers before acting on any items discussed.