How the tax provisions in the 2011 federal budget will shake out is uncertain. But the changes proposed by President Barack Obama could dramatically increase taxes on manufacturers, even though the corporate tax rate would stay the same.
The president's 2011 proposed budget will increase the aggregative business tax bill by more than $350 billion over the next 10 years, said a late-June report from the Manufacturers Alliance/MAPI, a public policy and economic research organization in Arlington, Va. This amounts to a 6 percent tax increase relative to the pre-budget baseline.
In addition, the proposed changes in tax provisions would make the federal deficit $100 billion larger than under the baseline by 2019 and likely mean the net loss of 500,000 jobs compared to the baseline, said the report's author Jeremy Leonard. Leonard is senior fellow at the Institute for Research on Public Policy in Montreal and an economic consultant at MAPI.
By contrast, the tax simplification proposal (S 3018) of Sen. Ron Wyden, D-Ore., and Sen. Judd Gregg, R-N.H., would add $500 billion to the gross domestic product by 2015 and result in 2 million more jobs than under the baseline scenario, according to Leonard.
The resulting dramatic increase in business profits would reduce the deficit relative to both the 2011 budget and the pre-budget baseline, he said.
The Wyden-Gregg bill would simplify the personal income tax system and reduce the corporate rate from 35 percent to 24 percent. It also holds personal income tax rates near current levels instead of raising them, which will aid S corporations.
We have to make sure we are not taxing the activity that creates the jobs and the investments, said Leonard. The strategic move now would be to reduce that tax burden, not find ways to increase it.
The president's proposals include changing the tax code to eliminate the LIFO (last in, first out) inventory method of accounting and tightening foreign tax credit pooling.
But much of the negative impact would come from the president's proposal to increase personal income tax, which would affect nearly 4 million S corporations and more than 3 million partnerships in the U.S. Together those companies account for 80 percent of all U.S. businesses and one-third of total U.S. business activity, according to the report.
S corporations and partnerships are directly affected by changes in personal income tax rates, Leonard said. In addition, S corporations would shoulder one-fourth of the $360 billion in additional revenue the proposed changes would raise, he said. S corporations and other pass-through manufacturing firms are much more heavily impacted than firms outside of manufacturing and C corporations within manufacturing, Leonard said.
As a result, S corporations and partnerships in the manufacturing sector would see their tax bills increase by an average of 14 percent if the president's proposals go into effect, according to the MAPI report. That means they will have fewer resources to invest in new capacity and new jobs, Leonard said.
Ronald Bullock, chairman of Bison Gear and Engineering Corp. in St. Charles, Ill., who funded the MAPI report, said: We need to be able to have incentives to invest in new products and new technology. We need some clarity when it comes to tax policies, otherwise businesses end up putting off replacing new equipment because of the economic uncertainty and it becomes a detriment to hiring as well.
I think we can incentivize entrepreneurs by simplifying the tax codes. Of all the industrialized countries, only Japan has a higher corporate tax rate than we do and they just decided to reduce it. If we, as a country, want to be fair to business, we need to be competitive on tax rates, Bullock said.
In terms of international competitiveness, reducing the corporate tax rate is the single most important thing that should be done. We can get the most bang for our bucks by improving the tax climate in the U.S.
The report said that policy makers, in trying to find revenues to fund their major new domestic initiatives, risk further undermining the competitiveness of American businesses.
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