Financial advisers who think that they will duck any hardship arising from Congress' game of chicken on tax policy could be mistaken.
If Congress makes progress on tax reform next year, it likely will mean changes to the corporate rate rather than the individual rate.
At a Capitol Hill event Dec. 7, officials from The Boeing Co., Nike Inc. and Texas Instruments Inc. called on Congress to lower the corporate rate. They said that the 35% level is undermining their ability to compete globally.
House Ways and Means Committee Chairman Dave Camp, R-Mich., introduced a draft proposal this fall that would lower the corporate rate to 25%.
The problem for investment advisers is that in order to lower the corporate rate by 10 percentage points, a lot of tax expenditures (e.g., deferrals and deductions) would have to be eliminated to pay for it.
Many of those expenditures are used on individual tax returns, where so-called pass-through entities, such as limited liability companies and limited liability partnerships, run their businesses. That means many advisory firms would take a hit.
Corporate tax reform leaves out about 93% of American businesses, according to Dean Zerbe, national managing director of alliantgroup, a tax advisory firm for small and midsize businesses.
“In fact, to the extent that business credits and incentives are eliminated to pay for corporate tax reform, these small and medium businesses will actually see a tax increase. This includes the vast majority of investment advisory firms that are organized as a pass-thru entity,” Mr. Zerbe, former tax counsel on the Senate Finance Committee, wrote in an e-mail.
Speakers at the Capitol Hill meeting, sponsored by Reforming America's Taxes Equitably, acknowledged that there will be a disconnect if corporate reform goes first.
“That is one of the reasons that many believe you have to do personal and corporate reform simultaneously,” said Douglas Holtz-Eakin, president of the American Action Forum.
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