Kogod Tax Center in Bloomberg BNA's Daily Tax Report by American University, Kogod School of Business

Daily Tax Report ®

NUMBER 25

FEBRUARY 8, 2012

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Survey Reveals Common Tax Reform Goals for Businesses of All Sizes: Uniformity of Views Could Buttress Legislative Prospects BY DAVID J. KAUTTER egardless of size, businesses appear to share common priorities for reforming the tax code in ways that will spur growth, according to a recent survey targeted to advisers who are Bloomberg BNA readers. Although the survey revealed some notable differences between advisers to small businesses and those advising mid- and large-size businesses, it underscored many areas of common ground.

All the advisers surveyed rated seven of 15 tax reform proposals as virtually identical in

ering of income tax rates for corporate and flowthrough income, and reduction of employer payroll taxes. But while small business advisers ranked alternative minimum tax repeal and payroll tax reductions for employers as most important, mid- and large-size advisers gave top priority to 100 percent expensing. The survey, conducted during the last week of November and the first week of December 2011, was jointly sponsored by Bloomberg BNA and the Kogod Tax Center at American University’s Kogod School of Business. The survey was intended to gauge the level of support, primarily among professional business advisers, of various proposals currently under discussion in Washington, D.C., and that could be included in a more comprehensive tax reform package.

importance, including extension of 100 percent

Gauge of 15 Proposals

expensing for equipment, lowering of income tax rates for corporate and flowthrough income, and reduction of employer payroll taxes.

All the advisers surveyed rated seven of 15 tax reform proposals as virtually identical in importance, including extension of 100 percent expensing for equipment, lowDavid Kautter is managing director of the Kogod Tax Center at the Kogod School of Business at American University in Washington, D.C., and executive in residence in the school’s Department of Accounting and Taxation. He joined the Tax Center after more than 30 years at Ernst & Young LLP, most recently as director of national tax. The Kogod Tax Center promotes independent research and expands knowledge with respect to tax policy, tax planning, and tax compliance for small and mid-size businesses, entrepreneurs, and middle-income taxpayers.

Kogod Tax Center, which is a research institute associated with the masters of science in taxation (MST) program at American University, focuses primarily on tax and business issues affecting small businesses, entrepreneurs, and middle-income taxpayers. Advisers to small businesses and entrepreneurs are very attuned to how their clients would respond to the types of proposals covered in the survey, so we were eager to see their views. The survey asked readers to share their views about the impact on growth of 15 proposals that would provide an array of tax incentives to both businesses and individuals: repealing the alternative minimum tax (AMT); reducing payroll taxes on employers; making the health care insurance deduction for selfemployment tax permanent; lowering income tax rates for corporate and flowthrough business income; extending 100 percent expensing; reducing payroll tax on employees; issuing definitive rules on ‘‘independent contractor’’ status; accelerating depreciation write-offs; lowering capital gains tax rates; eliminating estate taxes; making 100 percent gain exclusion on disposition of ‘‘qualified small business stock’’ permanent; increasing incentives for retirement plans; enacting a single, ‘‘flat’’ income tax rate; replacing the worldwide foreign earnings taxation system with a territorial system; and

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S L MI M A L E D/ L A RG

A notable finding of the survey was the remarkable similarity between the views of advisers to small businesses and those to mid- and large-size businesses when it came rating the potential tax reform proposals as ‘‘extremely important.’’ Of the 15 proposals surveyed, when you combine the top rating of seven with the next-to-top rating of six, advisers to small as well as to mid- and large-size businesses rated seven of the proposals as virtually identical in importance. For each of these seven proposals, there was a differential of only 3 percentage points or less in the ratings of small and those of mid- and largesize advisers. The seven proposals, listed in order of importance to small business advisers/mid- and large-business advisers, are:

32% 35%

s extending 100 percent expensing (39 percent /37 percent);

Small and Mid/Large Size Businesses Agree on Most Important Tax Reform Proposals 37% 39%

Extending 100% expensing S L MI M A L E D/ L A RG

Lowering of income tax rates for corporate and ﬂow-through income

Reducing payroll taxes on employees

36% 39%

S L MI M A L E D/ L A RG

28% 26%

Eliminating estate taxes

Issuing deﬁnitive rules on "independent contractor" status

Replacing the income tax with a national sales tax or other consumption tax

s lowering of income tax rates for corporate and flowthrough income (39 percent /36 percent); s reducing payroll taxes on employees (35 percent /32 percent); s eliminating estate taxes (26 percent /28 percent);

S L MI M A L E D/ L A RG

s issuing definitive rules on independent contractor status (22 percent /23 percent);

23% 22%

s replacing the income tax with a national sales tax or other consumption tax (22 percent /23 percent); and

S L MI M A L E D/ L A RG

23% 22% SM

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s enacting a single, flat income tax rate (18 percent /18 percent).

Top Priorities Differ, However However, with respect to which proposals were ranked as most important, there was a significant difference of opinion between small business advisers and advisers to mid- and large-size businesses.

18% 18%

Enacting a single, ﬂat income tax rate

While small business advisers ranked alternative S L MI M A L E D/ L A RG

This chart illustrates the seven most important tax reform proposals according to business advisors for small and mid/large business. A BNA Graphic/dy2025g2

replacing the income tax with a national sales or other consumption tax. Respondents were asked to rank these proposals on a scale of one to seven, with one being ‘‘not at all important’’ and seven being ‘‘extremely important.’’ For purposes of the Bloomberg BNA/Kogod survey, ‘‘small businesses’’ were defined as those with $10 million or less in gross receipts, a definition commonly used in the Internal Revenue Code and elsewhere.

minimum tax repeal and payroll tax reductions for employers as most important, mid- and large-size advisers gave top priority to 100 percent expensing.

Two proposals tied for first place in order of importance for small businesses—repealing the AMT and reducing payroll taxes on employers. Small business support for these two proposals outranked by more than 2-to-1 the level of support of mid- and large-size businesses. Making the health care insurance deduction for

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Tax Reform Proposals Ranked as Most Important 35%

Repealing Alternative Minimum Tax

18% 35%

Reducing payroll taxes on employers

14% 30%

Making the deduction for health care insurance for self-employment tax permanent

9% 26%

Lowering of income tax rates for corporate and ﬂow-through business income

18% 26% 23%

Extending 100% expensing

26%

Reducing payroll taxes on employees

14% 22%

Issuing deﬁnitive rules on "independent contractor" status

14% 22%

Accelerating depreciation

Lowering of capital gains tax rates

14% 17% 5% 17% 14%

Eliminating estate taxes

Making 100% gain exclusion on disposition of “qualiﬁed small business stock” permanent

17% 5% 17% 18%

Increasing incentives for retirement plans 9%

Enacting a single “ﬂat” income tax rate

18%

Replacing the worldwide foreign earnings taxation system with a territorial system

Replacing the income tax with national sales or other consumption tax

Small Business (10 million or less in gross receipts)

18%

Mid-sized/Large Business

18% 0%

10%

20%

30%

40%

50%

A BNA Graphic/dy2025g3

self-employment tax permanent was next in importance for small businesses, according to the survey. In addition to repealing the AMT being a No. 1 issue for advisers to small businesses, it also tied for second for advisers to mid- and large-size businesses, making it a high priority for businesses regardless of their size.

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Extending 100 percent expensing for equipment purchases ranked as the most important issue for advisers to mid- and large-size businesses, although for small business advisers it ranked behind the self-employment insurance deduction, along with lowering of income tax

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4 rates for corporate and flowthrough business income and reducing payroll tax on employees. Also important to mid- and large-size businesses are proposals that would implement major restructuring or replacement of the current tax code with new ways to tax business income. Other items ranked in a tie for second for mid- and large-size businesses were enacting a single ‘‘flat’’ income tax rate, replacing the worldwide foreign earnings taxation system with a territorial system, and replacing the income tax with a national sales or other consumption tax.

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This is not surprising, in that large businesses have a much bigger stake in proposals tied to their ability to compete in a global marketplace, thus their interest in national sales and consumption taxes and reform of the U.S. system that taxes their worldwide income. On the other hand, small and mid-size businesses are often focused on cash flow, both their own and their customers’, since revenue for these businesses is closely tied to disposable income.

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