Corporate Tax Reform: Listening to Corporate America

Article excerpt

  I. INTRODUCTION
 II. BACKGROUND ON FINANCIAL INCOME
   A. General Principles
   B. The Focus of Corporate Management
 III. VARIOUS TYPES OF CORPORATE TAX PREFERENCES
   A. Expensing and Accelerated Depreciation
   B. Deductions with No Economic Outlay
   C. Exclusions from Gross Income
   D. Tax Credits
   E. Deferral of Income
 IV. THE EFFECTIVENESS OF CORPORATE TAX PREFERENCES
   A. In General
   B. Accelerated Depreciation, Manufacturing Deduction and
      Research Credit
   C. Tax-Exempt Interest
   D. Deferral of Income and APB 23
  V. CORPORATE TAX RATE CUT
 VI. GENERAL REFLECTIONS ON VARIOUS TYPES OF CORPORATE TAX
   PREFERENCES
   A. In General
   B. Permanent Differences Versus a Corporate Tax Rate Cut
   C. Differences Among Permanent Differences
   D. The Importance of Temporary Differences
 VII. PRINCIPLES FOR REFORM OF CORPORATE TAX PREFERENCES
VIII. CONCLUSION

I. INTRODUCTION

On a typical hot and humid Washington summer day in 2004, representatives from a handful of America's leading manufacturing companies trekked to the Longworth House Office Building on Capitol Hill. On the second floor, the tax staffs of the Ways and Means Committee of the United States House of Representatives were hard at work on a huge tax bill that many in the business community believed was on the brink of enactment. The representatives walked the famed halls of the Longworth building, forever known as Gucci Gulch, (1) for a scheduled meeting with the tax staffs with one goal in mind: to try and prevent Congress from enacting a corporate tax rate cut for American manufacturing companies. The representatives knew that almost all public corporations in the United States desired a corporate tax rate cut. In fact, it was probably the single most desired tax item of Corporate America. However, the representatives also knew that of critical importance to public corporations were their quarterly (and annual) income statements. A corporate tax rate cut would cause a small group of manufacturing companies, on behalf of which the representatives were lobbying, to take an immediate charge (or "hit") to earnings--thereby reporting lower quarterly net income and lower earnings per share (EPS). (2) So even though a rate cut would benefit these manufacturing companies in future years, a current charge to earnings was unacceptable to this small but influential group of manufacturing companies. (3)

The representatives of the manufacturing companies asked the tax staffs to enact a tax benefit for American manufacturing companies in the form of a new deduction rather than a corporate tax rate cut, in the same manner that the Finance Committee of the United States Senate did in its tax bill. (4) And if the Ways and Means Committee consented to the tax benefit in the form of a deduction, the representatives requested that the deduction not look like a tax rate cut. If the manufacturing deduction looked too much like a rate cut, the Financial Accounting Standards Board (FASB) would likely treat it as such for Generally Accepted Accounting Principles (GAAP), and the companies would still have to reduce earnings and EPS. The tax staffs understood the request and conveyed it to the leading members of the Ways and Means Committee. In October 2004, the leading members of the Ways and Means Committee and the Senate Finance Committee convened. As part of their conference agreement, the Ways and Means Committee members agreed to the Senate Finance Committee's approach: enactment of a new manufacturing deduction, rather than a tax rate cut, coupled with a number of requirements that must be met in an attempt to avoid having the deduction viewed as a tax rate cut by FASB.

On October 22, 2004, President George W. Bush signed the American Jobs Creation Act of 2004 into law. (5) One of the centerpieces of the legislation was the new deduction designed specifically to benefit American manufacturing companies. …