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Tuesday, July 24, 2012

WSJ: Firms Pass Up Tax Breaks, Citing Hassles, Complexity

WSJ ChartWall Street Journal:  Firms Pass Up Tax Breaks, Citing Hassles, Complexity, by John D. McKinnon:

For years, politicians have used targeted tax breaks to try to influence corporate behavior, offering lower tax bills as an incentive to hire more workers, boost energy efficiency and buy more equipment, among other things.

But executives, particularly at small and medium-size companies, complain that many of the tax deductions are either too cumbersome or too confusing. In some cases, the cost of obtaining the tax benefit is greater than the benefit itself—a wrinkle that has helped spawn a cottage industry of tax-credit consultants. Also problematic is the threat of pushback from the Internal Revenue Service.

The result: many companies are saying "no, thanks" and are likely paying more taxes than legally required. And corporate breaks that Washington hopes will boost the economy often prove ineffective. ...

As Republicans and Democrats are gearing up to overhaul the corporate tax code next year, simplification has become a bipartisan rallying cry for several reasons. ...

Complexity is costly. Compliance costs for U.S. businesses and individuals have been rising, and now reach at least 1% of GDP, or about $150 billion last year, and possibly much more, according to congressional researchers.

The Byzantine nature of the tax code also adds to concerns about U.S. competitiveness in a global economy in which many other countries have eased tax rates and rules in recent years.

So if everybody agrees complexity is a pain, why does it persist? In part, both the White House and Congress can't seem to resist fine-tuning the tax code to satisfy their diverse goals. And once a break is created, the IRS must issue rules to prevent people from taking inappropriate advantage.

Tax consultants estimate that eligible businesses obtain as little as 5% of the main domestic tax breaks that they are entitled to claim. That means firms are leaving tens of billions of dollars on the table every year. Out of 1.78 million corporate tax returns in the U.S., only about 20,000 claimed any of the three dozen main business tax credits in the code, according to IRS estimates.

WSJ Chart 2

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