don't improve America's business climate because (i) prohibit long-term business planning; (ii) increase tax complexity (which disproportionately hurts small businesses that can't afford armies of lawyers and accountants); and (iii) encourage system-gaming and outright fraud, while discouraging business growth (i.e., small businesses becoming larger businesses and thus outgrowing their eligibility for the tax breaks).Today comes an excellent new story from the Wall Street Journal that provides tons of statistical and anecdotal support for my (admittedly unoriginal) conclusions and shows just how badly our elected officials have failed in reforming the US tax code and creating a business climate that is ripe for job creation. The entire article is well worth your time, but here are the highlights:
Both [parties] agree the code's complexity is unfair: While small and medium-size companies such as Raine forgo the headaches and the tax savings, bigger companies can more easily afford the specialized accountants and lawyers needed to claim the best breaks and gain a cost advantage...Just a reminder: according the aforementioned World Bank study (also mentioned in my earlier blog post) the United States ranks 72nd in the world in terms of total business tax burden - two spots worse than last year. And when the President and his party had total control of the US government in 2009 and 2010, they did absolutely nothing to reform the tax code and instead increased tax complexity and imposed new taxes via Obamacare. Thus, it appears that the only jobs created by the Democrats' tax policies are for tax lawyers and consultants - not exactly an efficient use of finite resources (no offense, tax lawyers).
Complexity is costly. Compliance costs for U.S. businesses and individuals have been rising, and now reach at least 1% of GDP, or about $150 billion last year, and possibly much more, according to congressional researchers.
The Byzantine nature of the tax code also adds to concerns about U.S. competitiveness in a global economy in which many other countries have eased tax rates and rules in recent years....
Tax consultants estimate that eligible businesses obtain as little as 5% of the main domestic tax breaks that they are entitled to claim. That means firms are leaving tens of billions of dollars on the table every year. Out of 1.78 million corporate tax returns in the U.S., only about 20,000 claimed any of the three dozen main business tax credits in the code, according to IRS estimates.
One example of the tough-to-take breaks is the federal Work Opportunity credit. It was designed to reward companies for hiring workers from several disadvantaged groups, including welfare and food stamp recipients, youths seeking summer jobs and ex-felons. The break typically lowers a company's taxes by up to $2,400 per employee. For businesses hiring unemployed veterans, it can be worth as much as $9,600 per worker.
The credit frequently goes unclaimed, largely because it is such a hassle. It requires extensive paperwork for each worker for whom it is claimed and the paperwork can often take a year or more to process. Sarah Hamersma, a University of Florida professor, estimates that companies claim the credit for just 20% to 35% of all eligible workers....
In the latest global rankings of national tax systems by the World Bank and PricewaterhouseCoopers, the U.S. came in 142nd out of 183 countries for the time it takes a hypothetical small manufacturer to calculate its corporate income tax (the higher the rank, the more time it takes)....
The tax thicket has been growing for years. In 1987, there were 128 major tax breaks for both individuals and companies, of which about 100 survive now. Another 100 or so have been created since then.
Many tax breaks, including the Work Opportunity credit, have recently expired but tax experts expect Congress to renew them retroactively by the end of the year, as it has in the past. Meantime, companies are unsure whether they can plan on it.
Another targeted break, the tax deduction for energy-efficient buildings, often requires computer modeling costing as much as $50,000. That leaves business owners weighing whether the credit is worth the expense....
One reason government officials favor the breaks is that they are a politically expedient way to pursue policy goals—and potentially less trouble than a fundamental easing of business tax rates and rules. Because of political pressure to hold down budget deficits, U.S. lawmakers often design tax breaks in ways intended to narrow the number of beneficiaries.
"The more complicated it is…the more [businesses] are going to say it's not worth the candle" to apply, said Dean Zerbe, a former Senate staffer who is now national managing director of alliantgroup, a tax consulting firm.
Because of low subscription rates for many tax breaks, a cottage industry of tax-credit consultants such as alliantgroup has sprung up. Fees tend to range from 15% to 30% of savings, according to consultants, but can be lower for large deals and occasionally higher.
But even with the availability of outside help, many businesses hesitate....
A tax credit that Congress enacted in 2010—for small businesses providing health-care coverage—was claimed by only about 170,300 employers, out of an eligible pool of between 1.4 million and four million businesses, according to the Government Accountability Office.
"The calculation was ridiculous," says Barbara Webber, property manager for Presidential Estates in Quincy, Mass., an owner of apartment complexes. Despite an accounting background, she said, "I struggled with it." In the end, she says, she didn't qualify due to IRS wage restrictions....
While many companies say it is too complicated to claim tax breaks, the ones who try can find themselves embroiled in complex disputes with the Internal Revenue Service.
One source of increasing contention is the federal research credit. Critics say the IRS sometimes demands more documentation than the rules require, and more than most corporate accounting systems can readily provide, in part because of overly aggressive claims by some firms in the 1990s. The result is sometimes lengthy litigation.
Bayer Corp., the U.S. unit of Germany's Bayer AG, BAYN 0.00% finds itself in just such a morass. In a dispute playing out in federal court in Pittsburgh, the IRS has disallowed 17 years worth of Bayer Corp.'s claims for the research credit—$175 million in all—on the grounds that Bayer hasn't adequately documented its expenditures or tied them to specific innovations.
Bayer said in court that it has provided adequate documentation and has gone to great lengths to gather the extra documentation that the government is demanding, but that it will take many years to fully comply with the IRS demand.
The dispute dates back to 1998. As it drags on, company officials worry it is leading their German parent to look elsewhere to conduct new research projects at a time when global competition for research and development, or R&D, dollars is heating up, according to court testimony....
And yet we're talking about Bain Capital pushing US companies and jobs offshore? Really?
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