Thanks For The Help, But…
Washington’s bid to boost the economy through tax cuts to small- and medium- sized businesses is a bust.
We have all heard politicians of both parties offering to help businesses through targeted tax credits. The theme is extremely popular in this election season with Washington claiming to have created millions of jobs by helping small- to medium- sized businesses through tax relief. The reality is that the targeted tax breaks (such as the Work Opportunity Credit, the building energy-efficiency credit, the health-care coverage credit, and the federal research credit) do not work. Tax consultants estimate that as little as 5% percent of eligible credits are actually claimed by US businesses. Consider the fact that even with 36 major business tax credits available only 20,000 out of almost 1.8 million US businesses claimed any of them on their 2011 corporate tax returns.
The complexity of the rules and the cost of compliance are the main reasons given for why firms are not taking advantage of the tax code. Why take a $50,000 credit if it will cost you $60,000 to gather the required documentation and correctly file the paperwork?
The tax system in the US is bizarre and broken. A recent article reported that the World Bank and PricewaterhouseCoopers rank the US 142nd out of 183 countries in terms of the time it takes for a small manufacturer to fill out its federal tax forms. In addition, congressional resources estimate that the complexity in the code takes about 1% of our GDP ($150 billion a year) right out of productive uses. There is also a global competitive issue at stake as other nations have lower rates and simpler tax codes.
Washington is set to discuss an overhaul of the corporate tax code next year. Hope would suggest that things will improve; experience would suggest that you keep your tax attorney/tax accountants on speed dial.
First economist that does not equivocate – enlightening!!