President Obama returns to an idea he introduced in 2012.
Provided by Alterra Wealth Management
What if corporate taxes were 7% lower? Specifically, what if the corporate tax rate was reset to 28%, 25% for manufacturing companies? As a tradeoff for this tax cut, what if multinational corporations based in the U.S. paid a one-time fee on accumulated overseas earnings? Finally, what if the resulting one-time revenue was spent on job training, education and infrastructure projects with the goal of reducing unemployment? That is what President Obama proposed on June 30, reviving an idea he talked about last year.1,2
Would it be “a grand bargain for middle-class jobs”? Given the possibility of a fall stalemate over federal budget negotiations, it is understandable that President Obama returned to his vision of a grand bargain. The odds of the bargain being struck appear long, however. The proposal already faces stern opposition from congressional Republicans.2
Detractors of the proposal say it isn’t a true tax cut – just a drop in corporate tax rates unequally counterweighed by measures to expand the tax base, such as the one-time fee on overseas profits and new limits on accelerated depreciation. They see a plan to fund a stimulus, not true tax reform.2,3
Voices in the small business community would like to see broader change. About 75-80% of American small businesses are pass-through entities subject to individual tax rates. They would get no tax break under the proposal, and some of the deductions and credits they count on could be reduced.4,5
While President Obama’s “grand bargain” seemingly has little chance of being realized, it isn’t the only tax reform idea in front of Congress right now.
Other proposals are on the table. The media hubbub over the President’s speech obscured some of the other efforts at tax law revision underway on Capitol Hill, which may significantly affect small businesses and start-ups.
The Senate Financial Committee (which is chaired by Montana Democrat Max Baucus, a key player in the tax reform debate) has mentioned an idea that might lower costs for investors in R&D firms and make the fundraising process easier for those companies. The proposal would let investors carry forward “any losses from investments in research-intensive small businesses and use them to offset gains for tax purposes in the future.” Ernst & Young projects that this could generate $10.3 billion more in such investments per year.6
Another proposal making the rounds in Congress would permit a new owner or acquiring company to tap net losses for a small, pre-profit company to offset their taxable revenue. As Inc. notes, researchers think that tax break may boost start-up investments by $5.5 billion a year and lead to approximately 85,000 new jobs.6
Lastly, there is a bill circulating in the House that calls for enlarging the capital gains exclusion pertaining to qualified small business stock. The proposed legislation would permanently boost the limit on that exclusion to $150 million in assets for eligible firms, widening the range of possibilities for investors. Ernst & Young researchers believe that if this tax law adjustment occurred, more than 350,000 new jobs would be generated.6
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