Max Baucus, the chairman of the U.S. Senate Finance Committee, donned his Dracula costume last month, and proposed retroactive taxation on the business community. Unlike Bela Lugosi in the original 1931 film, where Count Dracula says, “I have come to suck your blood,” Max has pulled on his rubber gloves and decided to probe the […]
Max Baucus, the chairman of the U.S. Senate Finance Committee, donned his Dracula costume last month, and proposed retroactive taxation on the business community. Unlike Bela Lugosi in the original 1931 film, where Count Dracula says, “I have come to suck your blood,” Max has pulled on his rubber gloves and decided to probe the business community’s colon to see whether it can withstand retroactive taxation.
In the senator’s defense, his goal is to overhaul America’s outdated tax code, which acts like a brake on the economy. He proposes “… to simplify tax rules, reduce the corporate income tax, lessen the burden on small business, and jumpstart job growth.” To accomplish this, Max also wants to raise more revenue to reduce the debt. One attaboy for Montana’s senior senator.
All doctors know, however, that the first rule of medicine is to do no harm to the patient. So what is Max’s prescription to accomplish reform?
While most of us were dreaming of the Thanksgiving turkey, Max and his committee cohorts sent up a trial balloon in the form of drafts of committee-staff discussions. The scope of the drafts expand the definition of taxable income, euphemistically called “base-broadening.”
The first proposal is called “deemed repatriation.” In Washington-speak, this means changing our present worldwide income-tax system, which requires individuals and businesses to pay U.S. tax on income earned abroad as well as on U.S. income. Currently, U.S. taxpayers may claim a foreign-tax credit for income taxes paid to other countries and may defer U.S. tax until they “realize” the income by bringing it back to the states. With anywhere between $1 trillion and $2 trillion in earnings sitting in overseas coffers, Dr. Max wants to change the rules by subjecting these funds to a one-time, 20-percent tax. By simply waving his colonoscope, voila, the funds are repatriated.
Next, our intrepid reformer turned doctor, wants to retroactively repeal the current depreciation schedule, including existing assets. On Jan. 1, 2015, Dr. Max proposes to change existing and future depreciation schedules to extend the period over which depreciation may be deducted against income. Yes, you read this correctly: the new system would apply to existing depreciable assets.
Finally, Max and his minions want to repeal LIFO. Last-in-first-out has been an accepted tool for inventory accounting since the Revenue Act of 1938. Under current law, a business can’t deduct inventory costs until it sells the items. LIFO thus serves as a hedge against inflation, by more accurately mirroring the true cost of the item. The result, typically, is lower reportable income. Enter Dr. Max, who would not only disallow LIFO, but also do so retroactively. Those enterprises utilizing LIFO will be required to convert their inventory recordkeeping to FIFO, first-in-first-out, and pay a tax on the accumulated difference.
Being the generous person that he is, Sen. Baucus would allow businesses eight years to pay for any back taxes on depreciation and LIFO revisions.
So who should enjoy this business colonoscopy? Clearly, the tax collector. Since business has so little time to adjust to these prospective changes, the U.S. Treasury projects a large, monetary windfall.
And who will bear the pain? Businesses. In a period of great economic and political uncertainty, the tax-grab will make companies even more reluctant to invest, because there is no clarity in the after-tax returns of future investments. Furthermore, the retroactive taxes are plainly unfair. Third, large tax increases may strain companies financially, because they have already committed the anticipated funds to other purposes.
At least Count Dracula was confined to celluloid. Dr. Max, a.k.a. your friendly gastroenterologist intent upon confiscating wealth obtained legally, is not contained. I hope the good doctor at least offers the business community a strong sedative before he begins his procedure.
Contact Poltenson at npoltenson@cnybj.com