Tax Reform 

Retail taxpayers typically have among the highest effective tax rates, hitting the top statutory rate of 35 percent in many cases.  In addition, retail companies typically benefit from few tax provisions currently in the tax code.  As a result, RILA urges Congress to undertake a comprehensive effort to broaden the tax base in order to lower the business tax rates substantially.  RILA looks forward to working with policymakers at all levels of government to implement meaningful tax reform that includes provisions that support the retail industry, help it grow, and create jobs. 

As part of any major tax reform proposal, it is important to recognize that the current rules governing individual taxation and domestic and international taxation are inexorably intertwined.  Accordingly, fundamental tax reform must address all aspects of the tax system, and Congress should focus on the following principles:

• Keep tax rates low – Enabling individuals to keep more of what they earn encourages savings and enables them to make purchases of needed consumer products, which also has the benefit of providing a major stimulus to the economy including sustained, improved retail sales.  Similarly, low tax rates help American businesses by increasing capital for investment and job creation.
  
• Enact simple, predictable and easy to understand tax rules – A tax system that individual and business taxpayers can easily understand will improve compliance and reduce the cost of tax administration.
  
• Establish tax rules that are consistent with economic reality – For business taxpayers in particular, tax rules need to result in appropriate timing and accurate reflection of income without arbitrary rules that, for example, delay deductions beyond the period in which the income is earned or set depreciation periods inconsistently with the real economic life of the property.
  
• Ensure the tax system fosters business competitiveness and promotes economic growth – In an increasingly global economy the tax system should not hinder the ability of U.S. businesses to compete internationally as well as domestically against foreign firms.  A tax code that treats business fairly and equitably will minimize burdens on compliance and decision-making, thereby enhancing the productive capacity of U.S. businesses and the U.S. economy.
  
• Implement reforms that ensure industry-specific neutrality – Business decisions should be based on economic benefits of the particular transaction, not driven by special tax benefits targeted to one industry versus another.  The economy does not benefit when the tax code chooses winners and losers.  Accordingly, tax reform should allow the marketplace, not the tax system, to allocate capital and resources appropriately.
  
• Avoid a whole-scale change in the tax base – Dramatic shifts in tax policy, such as implementing a national retail sales or value-added tax, would be immensely disruptive to the economy and particularly detrimental to lower-income workers and families.
  
• Make changes permanent and ensure certainty – A new tax system must be permanent and stable, not littered with expiring provisions that cause uncertainty for families saving for college and retirement and business striving to expand, create jobs, and remain competitive in the United States and abroad.
  
• Provide realistic transitions rules – Significant changes to the current tax system will create substantial burdens on taxpayers, especially in the business sector, to ensure compliance.  Establishing transition rules that provide adequate time for implementation and that take into account existing agreements, practices, and other requirements is essential for the success of any new tax system.
  
• Recognize that tax revenues are one part of fiscal discipline – As with any business, long-term fiscal viability requires careful management of both revenues and expenses.  The tax-revenue lever can only be pulled so much and so often before it harms the business sector (with resulting effects on tax revenues from businesses, employees, and investments).  Equal attention must be given to government spending to strike a reasonable balance with a tax code that fosters economic growth, job creation, and investment.

Retail is vital to our nation’s economy, representing one of the largest industry sectors in the United States with more than 14 million jobs today /9/ and $3.9 trillion in annual sales according to the most recent data from 2010. /10/  The industry pays billions of dollars in federal, state, and local income taxes, and collects and remits billions more in state and local sales taxes. 

Most policymakers recognize that the current federal tax system is overly complex and in dire need of reform.  The last major overhaul of the system occurred with the enactment of the Internal Revenue Code of 1986, which compressed 15 individual income tax brackets down to two and restructured much of the corporate tax system as well.  Since 1986, Congress has made thousands of changes to the tax code, in many cases only on a temporary basis, increasing its complexity, instability and compliance burdens for individuals and businesses alike.  Periodically, over the past two decades efforts to reform the tax code have been started, but none have reached fruition. 

Legislation introduced in the 112th Congress concerning fundamental tax reform, includes the Bipartisan Tax Fairness and Simplification Act of 2011, introduced by Sen. Ron Wyden (D-OR) and Sen. Dan Coats (R-IN).  While this legislation models reform on the structure of the 1986 Tax Reform Act, it also includes provisions to eliminate important provisions under current law, such as the last-in-first-out (LIFO) inventory accounting method. /11/  Although some plans for fundamental tax reform are more specific than others, none includes the level of detail that would be required to make a plan completely operational, and significant transitional considerations remain to be addressed.

More broadly, the work of the National Commission on Fiscal Responsibility and Reform in 2010 (noted above), adds to the historic efforts to rekindle broad-based tax reform and follows the review undertaken by the President’s Economic Recovery Advisory Board in 2009 and 2010.  The latter panel released a report on August 27, 2010, which outlines a range of tax reform options, including a corporate rate reduction, but the report makes no specific recommendations and did not mention a value-added or national sales tax. /12/

Another recent example was the President’s Panel on Federal Tax Reform, established by President Bush.  On November 1, 2005, the Panel released its final report, which recommended two options to reform the tax code. /13/  The first, the Simplified Income Tax Plan, would eliminate most of the current targeted tax deductions and hidden taxes like the Alternative Minimum Tax, and provide lower tax rates.  It also proposed an updated corporate tax regime to help American corporations compete in global markets.  The second option, the Growth and Investment Tax Plan, expanded on the Simplified Income Tax Plan by seeking to eliminate the tax on individual savings and businesses investments by establishing a single, low tax rate on dividends, interest, and capital gains and allowing businesses to expense their investments immediately.  Notably, the Panel’s report did not include a recommendation for a national retail sales or value-added tax.

Similarly, the Treasury Department released a study in December, 2007, outlining three broad approaches to overhauling the corporate tax code. /14/  The first approach would replace the corporate income tax with a business activity tax (BAT) with a tax rate between 5 percent and 6 percent to achieve revenue neutrality.  Companies would be taxed on gross receipts, minus the cost of goods and services purchased from other businesses.  Because wages would no longer be deductible, this approach would raise business taxes on labor.  Treasury estimated this approach would improve economic performance, ultimately increasing the size of the economy by roughly 2.0 percent to 2.5 percent over the long term.

The second option would lower the maximum corporate tax rate (currently 35 percent) by eliminating the majority of business tax deductions, including the research and development tax credit, deduction for charitable contributions, and low-income housing tax credit.  Of particular importance to retailers, this approach did not contemplate changes to the LIFO or the lower-of-cost-or-market inventory accounting methods.  This approach would also implement a territorial system for the taxation of U.S. companies’ foreign earnings.  Treasury estimated that to maintain revenue neutrality the rate could be lowered to 28 percent with full business-tax base broadening or 31 percent if accelerated depreciation was retained.  However, the report noted that at such tax rates, this approach would not provide much, if any, net gain to the U.S. economy.  In addition, U.S. statutory business tax rates would still be higher than those of most Organisation for Economic Cooperation and Development (OECD) countries.  Treasury estimated that business tax rates would have to be cut dramatically (e.g., 20 percent) or greater equipment expensing would have to be provided in order to achieve more significant benefits to the U.S. economy.

Third, short of full reform of the tax code, the Treasury study offered a package of proposals aimed at specific areas of the business tax system that could be modified, including elimination of multiple taxation of corporate profits through a corporate capital gains rate and dividends received deduction, modification of the tax bias favoring debt financing, improvements to the taxation of international income, broader allowance of losses, improvements to book-tax conformity, and other areas to improve tax administration.

Additional References

• RILA Issue Brief:  International Tax Reform
• RILA Issue Brief:  National Retail Sales Tax
• RILA Issue Brief:  Expiring Tax Provisions
• RILA Issue Brief:  Internet Sales Tax Parity