Round Up the Usual Suspects - Paying for a 28% Corporate Rate

Originally Published on forbes.com on February 24th,2012

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President Obama wants to cut the maximum corporate tax rate from 35% to 28%.  This has some fascinating implications depending on what else changes.  If we assume that the Bush tax cuts on individuals expire making the top individual rate 39.6%, this will be really interesting.  Will it lead to a renaissance for C corporations ?  It seems unlikely that the top individual rate would go to 39.6% and the dividend rate stay at 15%, but if that were the case “double taxed” income would be bearing a slightly lower burden than single taxed income from flow through entities. (You don’t add the 15% to the 28%.  You apply the 15% to  the 72% that is left after the 28% is paid).  Even if the capital gain rate is at 20% and dividends are ordinary, the C corporation might look attractive in growth situations.  There is a lot more involved and I would be slow to revoke an S election or incorporate a partnership, but it might be worth doing a study.  Perhaps an expensive study.  $Ka-ching$.  I’m liking the prospect already.

Of course the rate decrease has to paid for.  This is where President Obama is taking a page from Captain Renault’s book:

The President’s Framework for Business Tax Reform indicates that “dozens” of loopholes and tax expenditures must go but when it comes to specific examples they round up one shy of a half dozen and they really are the usual suspects.  I have thoughts on a couple of them:

If Carried Interest is so Bad Why Don’t You Issue a Regulation ?

Venture capital managers get much of their compensation in the form ofcapital gains.  This is not a loophole, it is based on fundamental principles of partnership taxation.  The various fixes for it add on the order of 3,000 words to the Code and have actual loopholes, but it is probably President Obama’s favorite usual suspect.  I also think that his attack on carried interest is phony.  There is an argument that the “abuse” could be ended by regulation, which would create a scene like this:

According to this story, the President is the champ when it comes to taking donations from private equity.  We can’t rule out the President looking at the example of the husband of his Secretary of State, who has gone from presiding to private equity consulting.  I can see the picture now, if somehow despite all his non-efforts the loophole is not closed, of how it will be with the President and his private equity donors, when he is done presiding:

Let Them Get Groped

Occupy Wall Street talks about the 1% and the 99%.  When it comes to some things, though, I think there is a more of tripartite division.  For talking purposes, I’m going to throw out 1%, 69% and 30%.  One of the loopholes specifically mentioned in the framework is accelerated depreciation oncorporate jets.  Not having to wait in long lines to be groped and then shoe-horned into seats that were designed based on the fact that most people are short is probably the most obvious privelege that the 1% have over the 69%, so this seems like a good one to target.  Those of us who are in the 69% should temper our resentment, though, and think of the 30% who have to do their long distance travelling by bus or not at all.

What About Wollastonite ?

Percentage depletion for oil and gas is also on the list. Usually when you sell something you get to deduct your basis in the thing you sold.  With percentage depletion, though, you deduct a percentage of the revenue and after the basis is used up you keep on deducting.  It is why owning a gold mine is like owning a gold mine.  Which raises the question, why are you ending percentage depletion just for oil and gas and not for all the other things it applies to like gold and wollastonite, whatever that is.  Ben Bartelle, a scientist did a guest post on the issue, the last time I asked the question.

Don’t Forget the Zombies ?

You can’t have a CPA explain the LIFO inventory method in the same article in which he discusses percentage depletion, because he’ll be compelled to launch into a discussion of sum of the years depreciation.  So I won’t explain LIFO, but will observe that its repeal will eliminate a disincentive towards moving to just in time inventories.  Anybody who has reflected on Zombie Apocalypse Preparedness will realize what a bad thing this is.  Once we have established our strongholds with safe surrounding areas to practice semi-subsistence agriculture, we are going to be sending out scavenging parties.  What will they find ? A lot of abandoned warehouses due to just in time inventories.  Not a pretty picture, even for a dystopian nightmare.

The other suspect is some gimmicks with corporate owned life insurance.  I’m willing to throw that under the bus, but you can bet the life insurance guys will protect it.  It is interesting to note that three of this five were on the list when President Obama proposed the American Jobs Act of 2011.

You can follow me on twitter @peterreillycpa.