Originally published on Forbes.com.
Tax Executives Not Feeling The Bern
A survey of tax executives shows that they believe that the candidate that would have the least favorable tax policy for business income is Bernie Sanders. Who knew? He wins that contest by a landslide with 78.15% of the vote. Hillary Clinton is a distant second with 10.92%. That is hardly a surprise, but there were some interesting things in the two surveys that I recently looked at. The tax executive survey, 2016 Tax Policy Forecast Survey was the work of Miller & Chevalier (MC). Business Leaders React to Proposed Tax Changes (Download) comes from Friedman LLP .
Tax Executives
The biggest concern of the tax executives in the MC study is elimination of deductions, credits, etc. without offsetting rate decreases, followed by the top statutory rate and taxation of international operations. When asked about what in the current US tax system most harms global competitiveness, nearly half cited the high statutory rate and nearly 30% our use of a worldwide rather than territorial system.
The tax executives are almost evenly divided on whether Paul Ryan replacing John Boehner as Speaker improves the chances of comprehensive tax reform in 2016, but by a 2 to 1 margin think that the change will help lead to some tax legislation. Although over a third believe that a new congress and new president will make for substantive discussion of comprehensive tax reform, just over 10% think that there will be actual enactment of comprehensive tax reform. All in just over half think there will be at least modest tax legislation.
As far as handicapping the election goes over 90% of the tax executives think the Republicans will hang onto the House with more than half thinking they will also keep the Senate. Less than 1% think the Democrats will get both houses. Republican control of both houses is the scenario that almost 90% think is most likely to lead to comprehensive tax reform. Just over half think that the presidency will go to Hillary Clinton. They had Rubio second, followed by Trump.
The executives seem pretty evenly divided on which Republican will be best for tax policy for business income. When the survey was taken Bush was still in and he was there favorite with Trump second. Nobody thinks Bernie Sanders would be good. Go figure.
Less than 15% of the tax executive rate complexity as the number one problem to be addressed by tax reform. They are much more concerned with the high statutory rate and taxation of worldwide income. Their biggest worry about tax reform is that the rate will not come down enough. Other concerns that engaged around 10% of the respondents were limitations on interest deductibility and unfavorable cost recovery changes.
In terms of the top corporate statutory rate over 75% of the respondents predict something between 25% and 28%. Less than 2% think it will be over 30%. As far as top individual rate goes nearly half think it will be 35% or higher and less than 4% think it will be under 24%. Seems like the tax executives envision a renaissance for C corporations.
And Others
The Friedman survey polled senior leaders of US based businesses. I should note that the introductory letter from Friedman’s tax practice leader has a familiar face on it to me, Robert Charron, whom I worked with closely until he moved to the Big Apple.
The Friedman survey was to a more eclectic group and provided some results that were surprising. When asked about what proposed changes might be of concern to them, over 60% mentioned the elimination of the home mortgage interest, over 50% mentioned health insurance deductions, charitable contribution deductions and state and local tax deduction. The only business proposal that concerned more than 40% of the group was the elimination of the business interest deduction.
The result is rather surprising to those of us who do returns, because for someone of very high income, it is practically impossible for the mortgage interest deduction to be of really great significance and state and local tax deductions are often lost to the AMT. On the other hand the business interest deduction does seem like something they should be worried about and I have been surprised up till now that it has not been the cause of more concern. In the commentary with the survey Friedman really hits the nail on the head.
Eliminating the business interest deduction is designed to make companies indifferent between issuing debt or equity – particularly if there are corresponding changes to the taxation of interest and dividend income on the other side of the transaction. This is fine for large, publicly traded corporations – those with access to both the public debt and equity markets –and perhaps it represents both good public policy and good corporate stewardship. However, for those businesses who lack access to public capital, it could – if enacted quickly and without due consideration to the potential impact – hamper the growth of closely held companies.
The other surprising result was on the question of whether state and local tax nexus would influence future expansion plans. 47% of the respondents said no and 10% indicated that they did not know. On reflection, it is perhaps not that surprising, as SALT concerns are often an afterthought and sometimes the source of nasty surprises.
A related question was how much state local tax incentives would encourage a business to move. Although the majority indicated that incentives would have some influence, only a quarter indicated that they would be a major influence.
Just over half of the respondents with international transactions found the international tax environment at least somewhat overwhelming. On a perhaps encouraging note, 65% of the business leaders indicated that they would not move their intangible property and logistical functions outside the United States even if it meant achieving a tax rate as low as 10%. The folks at Friedman seem to think that they are missing out.
In the current global environment, where small companies can sell online around the world and the challenge for finding talent can result in businesses looking abroad for engineers and technicians, businesses should be aware of these “patent box” regimes which are offered by developed, commercially sophisticated countries. Businesses should regularly assess whether they could take advantage of these regimes to bring down their medium term tax rate, and to retain cash for further business development and expansion.
Kim Dula indicated that what a lot of the respondents would hope for in a tax regime is that it would have consistency and clarity and would stay stable for a long period of time.
Other Coverage
The TaxProf was way ahead of me on covering the MC study with an emphasis on the notion that Republican control of both houses creates the most hope for tax reform. Accounting Today also covered the MC survey focusing on concerns about US tax system not being competitive. Accounting Today also noted the Friedman survey remarking on the odd emphasis by leaders on individual issues over business issues.