Enough Complaining -- A Few Ways to Fix the Broken Tax Code

This much we know: the U.S. tax code is too burdensome, too complicated and often unfair. So much so that domestic and foreign corporations alike are increasingly inclined to look outside the U.S. to accommodate their growth and expansion plans.

Consider Coca-Cola (NYSE:KO) Chief Executive Muhtar Kent’s comments earlier this week to the Financial Times that onerous tax burdens and political gridlock in the U.S. have “in many respects” made China a more attractive place to do business.

The consequences are clear (and dire): a lot of new jobs may be heading overseas at a time the U.S. desperately needs them.

“If people don’t think companies are being forced to leave our shores they need to take a look around at what’s happening,” said Kem Hawkins, president of Bloomington, Ind., medical device maker Cook Group. “Our government shouldn’t be placing obstacles in the path of companies that employ Americans.”

Let’s get the obvious complaints out of the way: the U.S. corporate tax rate stands at 35%, the highest in the world; at more than 70,000 pages and containing about the same number of deductions and loopholes, the tax code is absurdly complicated; powerful corporations and individuals can game the system by paying the right people to help them exploit those myriad deductions and loopholes.

What then to do now that tax reform is at the forefront of a raging battle over how to reduce the massive U.S. deficit while simultaneously keeping U.S. companies competitive in an increasingly challenging global market place?

From interviews with business owners and corporate leaders a handful of common-sense solutions emerge from the cacophony of complaints.

First, stop all the temporary measures and focus on long-term, systemic reform.

Arguably the single most irksome aspect of current U.S. tax policy for people trying to run a business is Washington’s fondness for temporary tax relief. Many of the current tax relief measures proposed in President Obama’s recent Jobs Bill – notably those targeting employer and employee payroll taxes – are “tax holidays” rather than permanent changes to the tax code. If approved, they would expire at the end of 2012 and the debate to extend them will begin all over again.

Even President George W. Bush’s first-term tax cuts, which lowered rates across the board early last decade, were structured so that they would expire after a decade. Maintaining those lower rates is now a major point of contention between Democrats and Republicans.

“The number one thing that Congress and the White House could do is not so much cut taxes, which is always welcome of course, but provide some stability and predictability over the next five to ten years,” said Farrell Quinlan, state director for the Arizona branch of the National Federation of Independent Businesses.

By habitually approving temporary measures the politicians are merely “kicking the problem down the road,” said Quinlan. Consequently they “completely miss the point of stability and predictability. From a planning standpoint, from a position of taking risks and making investments, those measures work against themselves.”

What’s needed is systemic, structural, long-term tax reform that allows businesses, big and small, to plan not just one or two years out but a decade or more.

Second, the tax code should be vastly simplified to reflect the size and scope of a business.

Another widespread complaint is that the labyrinthine tax code unfairly burdens small-businesses owners. The cost of staying on top of the ever-changing tax leviathan threatens their very livelihood, while the big guys who can afford to exploit all the loopholes.

“I think the people that are in charge, they forget about us little guys. They look at the bigger folks,” said Melise Smith, owner of Melise’s Boutique, a consignment and formal wear shop with 10 employees in downtown Marion, Ill. “I believe we’re just slipping through the cracks.”

Smith said she keeps a CPA on retainer at all times to make sure she stays in compliance with the constantly-shifting federal and state tax codes. But even that is no guarantee that a form won’t get misplaced or a tax bill paid late. And then she gets penalized.

“There are so many different kinds of taxes that you have to keep on top of. It’s very complicated. Once I didn’t turn in something correctly and I had a penalty tax. That starts to sting those penalties,” she said.

Third, stop scapegoating politically expedient industries.

At the other end of the spectrum are the massive oil companies, specifically targeted by the president’s $447 billion “American Jobs Act,” which also seeks to cut the deficit by $3 trillion over the next decade.

The so-called “jobs bill” would raise $41 billion during the next 10 years by eliminating various energy industry deductions. “Do we keep tax loopholes for oil companies, or do we put teachers back to work?” Obama said pointedly in a speech introducing the proposed legislation earlier this month.

The oil companies believe they’re being scapegoated by the White House, set up as political piñatas, and that such a strategy is detrimental to the cause of real tax reform.

“We understand that any type of tax reform, if it’s going to be broad, it’s going to look at all players and all issues. We understand that and we’ll be a part of that,” said Stephen Comstock, manager of tax policy at the American Petroleum Institute, a trade group. “But being specifically targeted because we're where the money is -- that’s not the way to run tax policy.”

Comstock defended the deductions, arguing that they allow the “capital intensive” oil companies to recover their considerable costs and reinvest money back into their projects, a cycle that maintains and creates jobs.

Cook Group’s Hawkins said the medical devices industry was also arbitrarily singled out under Obama’s 2010 health care reform law, citing a 2.3% excise tax included in the legislation that’s been imposed on most medical devices.

Hawkins said the excise tax will cost Cook Group about $17 million in 2011, or more than the $12 million it cost to open a new plant in Canton, Ill., a plant that now employs 300 people. The implication is clear.

“We lost the textile industry. We lost the steel industry. And we darn near lost the car industry,” said Hawkins. “This is real money that is reinvested to grow our company and create jobs.”

In effect, what these two business leaders are saying is, "Why us? Why not big pharma, or the banking industry, or agriculture?" Or anyone else for that matter. Serious reform won’t occur if specific industries are targeted because they’re politically expedient. These antics gut the effort by calling into question the credibility of the would-be reformers and by  polarizing the groups that need to come together to find solutions.

Finally, tax reform should encourage risk rather than discourage it.

There has been widespread criticism of a key element of the president’s jobs bill, a plan to raise taxes on millionaires, dubbed the “Buffett Rule” and named for billionaire investor Warren Buffett. The White House claims the tax is needed because millionaires aren’t paying their fair share.

Eric Jackson, chief executive of CapLinked, an online platform for private investing, said the tax is certain to curtail innovation in the technology sector, especially among startups.

The rule primarily targets capital gains, or profits from dividends and the sale of stocks and other investments. That’s where most millionaires derive their income, Jackson explained.

But the profits from capital gains are what most technology investors – so-called “angels” – use to provide seed money for countless startups, companies that might one day grow into the next Facebook, Google (NASDAQ:GOOG) or YouTube.

“Let’s face it, the way that risky companies like this get funded is by individuals. So let’s not penalize them for making those investments,” said Jackson. “Who cares that they’re millionaires? It’s good that they’re millionaires. Let’s put their money to work.”