On February 22, 2012, the White House and the Department of the Treasury issued "The President's Framework for Business Tax Reform" (the "Framework"). Issued a week after the General Explanations of the Administration's Fiscal Year 2013 Revenue Proposals (the "2013 Greenbook"), the Framework is not a definitive proposal for tax reform. Instead, it is, in part, a preliminary and general proposal for overall reform of the business tax system, and, in part, a political document staking out the President's election year position on business tax reform and the economic justifications for each of the major planks of the Framework.

The Framework was issued at an uncertain time for tax legislation. The national political forces have been at a continuing series of impasses and were barely able to extend a popular temporary middle class payroll tax cut in an election year because of conflicts collateral matters in the legislation and the desire of both sides to make their respective political statements. In the end, the fear of the political repercussions of inaction proved to be the strongest force in Washington, but perhaps only because the payroll tax cut extension resulted in many "winners" and no clearly identifiable "losers."

On the other hand, in any type of tax reform, there are likely to both winners and losers and, as in the case of the Tax Reform Act 1986, the political process must unfold over a period of time. Consequently, enactment of business tax reform in 2012 seems highly unlikely.

Somewhere between these two extremes lie expired business tax provisions, which have been repeatedly extended for several years -- often without revenue offset. Some have called for closer examination of each of these extender provisions in the light of the deficit. The Framework takes the view that each of these must be either eliminated or made permanent with a revenue offset. At minimum, it appears that this controversy will slow down the re-enactment of these extenders, possibly until after the election, or even beyond.

The underlying principle of the Framework is that tax reform of the type advocated by the President is required because the United States has a relatively narrow tax base when compared to that of other countries due to reductions by "loopholes," tax expenditures and tax planning, combined with a statutory corporate tax rate that will soon be the highest among advanced countries. As a result, the U.S. tax system is uncompetitive, inefficient and distorts choices on where to produce, in what to invest, how to finance and what business form to use. In particular, the system tilts decision making against U.S. job creation and investment and allow firms to benefit from overseas incentives and profit shifting strategies. In addition, the large number of tax expenditures and loopholes require numerous complex rules to restrict the benefits to the intended beneficiaries, placing a large compliance burden on taxpayers, in terms of both time and expense. As a result, the system is too complicated for small businesses.

While most would agree with the broad principles set forth above, there is not broad agreement regarding the administration's solution, portions of which have already been released in the Greenbook or in previous budgets. The reform set forth in the Framework is to lower corporate rates, cut tax expenditures and loopholes and increase incentives to invest and hire in the United States while providing disincentives for American companies to invest and hire overseas. The Framework is divided into five elements.


The economic analysis in the Framework describes how the United States has fallen behind in the race to have a competitive and efficient tax system. When Japan reduces its corporate tax rates in April 2012, the United States will have the highest statutory corporate tax rate among the advanced economies. The United States, however, does have a competitive overall effective marginal rate because of the numerous tax expenditures and loopholes, as well as opportunities for tax planning available to companies. The tax burden and effective marginal rates vary across industries by type of financing (with a clear bias toward debt), by business form (with a clear and increasing bias toward pass-through entities rather than corporations) and are in favor of shifting production and profits overseas.

The proposals of element one are to:

  • Reduce the top statutory corporate tax rate from 35 percent to 28 percent. This reduction is in line with other proposals advanced in the past.
  • Eliminate "dozens" of loopholes and tax expenditures. There would be a "presumption" in favor of eliminating all tax expenditures for specific industries, with exceptions for those that "are critical to growth or fairness." The following benefits are specifically identified for elimination:
    • Last in first out (LIFO) accounting. This affects a number of industries, but notably oil and gas. This proposal has been included in President Obama's budget proposals, including the 2013 Greenbook.
    • Oil and gas "preferences," including expensing of intangible drilling costs and percentage depletion. These proposals also have been included in President Obama's budget proposals, including the 2013 Greenbook.
    • Interest deductions attributable to corporate-owned life insurance policies, unless the contract is on an officer, director or employee-owner. The Framework additionally proposes other changes in taxation of insurance companies and products related to information reporting, simplification and loophole closing.
    • Capital gains treatment for carried interests in investment services partnerships.
    • Special depreciation rules for corporate aircraft to put them at parity with commercial aircraft.
  • Broaden the corporate tax base in a manner sufficient to bring the top rate down to 28 percent by some combination of the following:
    • Moving from accelerated depreciation to "economic" depreciation. Although not described, this appears to encompass increasing depreciation lives and curtailing the use of certain front-loaded depreciation schedules.
    • Reducing the deductibility of interest.
    • Establishing greater tax parity between large corporations and other large non-corporate entities by, for example:
      • requiring all "large" businesses (defined as publicly traded companies or private companies that have been deemed "large" based on income, assets or number of shareholders) to pay the corporate income tax, or
      • eliminating the double taxation of corporate income and harmonizing tax rates on corporate and non-corporate income through integration with the individual income tax.
  • Reduce the gap between corporate book income reported to shareholders and taxable income reported to the IRS and increase the disclosures of corporate taxes and tax payments.


This element of the Framework would attempt to incentivize U.S. manufacturing through a lower rate, a more robust tax credit for research and development and additional incentives for manufacturing of clean energy technologies.

The proposals of element two are to:

  • Cut the top corporate rate on manufacturing income to 25 percent by increasing the deduction for domestic production activities, focusing the deduction on manufacturing activities instead of production activities (including oil and gas production), and further increasing the deduction for "advanced manufacturing," a euphemism for manufacturing of renewable energy equipment.
  • Make the research and development tax credit permanent and increase the rate of the alternative simplified credit from 14 to 17 percent. The Framework does not state whether the more complex "regular" 20 percent credit would be retained.
  • Enhance incentives for investment in clean energy. This includes making permanent the tax credit for the production of electricity from renewable sources, extending the credit to solar energy and making the credit refundable. The Framework is not specific about other incentives in this area.


The Framework states that the tax code enables U.S. companies to reduce taxes by locating actual operations and profits abroad or by shifting U.S. profits to low-tax jurisdictions through transfer pricing or the use of "accounting tools." Because the U.S. tax system does not generally impose tax on corporate income earned abroad, opportunities for tax deferral can make the U.S. system close to a territorial system as companies seek to shelter profits in low-tax jurisdictions. This may lead to inefficient overinvestment abroad and underinvestment in the United States, erode the U.S. tax base, burden companies with complex and expensive compliance requirements and unfairly benefit the most sophisticated companies by offering the opportunity to manipulate intricate rules. Notwithstanding the movement of many countries to a territorial system of taxation, the Framework rejects such a switch because the administration believes that this would aggravate many of the current tax problems by increasing the incentives to locate operations or to shift profits out of the United States.

The proposals of element three are to:

  • Require companies to pay a minimum rate of tax on overseas profits. Under this proposal, foreign income deferred in a low-tax jurisdiction would be subject to immediate tax (presumably under subpart F) with a credit allowed for taxes paid to the host country on the same income. Details of this new proposal have not been specified.
  • Deny tax deductions from moving a U.S. trade or business overseas and the granting of a 20 percent credit for the expenses from "moving operations back" to the United States. This proposal was first issued in the 2013 Greenbook.
  • Tax excess profits associated with intangible assets shifted to low-tax jurisdictions as subpart F income. This proposal is included in the 2013 Greenbook and has been included in several of the President's budgets.
  • Defer U.S. deductions for interest expense allocable to foreign deferred income until the related income is repatriated. This proposal is included in the 2013 Greenbook and has been included in several of the President's budgets.

As the discussion of tax reform continues, it is likely that the administration will advance additional international proposals from prior presidential budgets.


The Framework asserts that small businesses are disproportionately faced with an overly complex tax code, although their transactions are typically not complex. The cost of the complexity burden is substantial and may lead to weakened compliance and frustration of tax policy. A goal of the Framework is that small businesses receive a net tax cut from reform.

The proposals of element four are to:

  • Allow the annual expensing of up to $1 million in capital investments. There have been several temporary increases in the expensing provisions in recent years. This increase is intended to be permanent and most small businesses would no longer have to track depreciation schedules.
  • Allow small businesses with up to $10 million in gross receipts to use cash accounting. The current threshold is $5 million.
  • Double the tax deduction from $5,000 to $10,000 for start-up expenses. The excess would continue to be written off over 15 years.
  • Expand the coverage of the health insurance tax credit for small businesses to companies with 50 workers (up from 25). In addition, a more generous phase-out schedule would be provided and rules would be streamlined.


The Framework requires that business tax reform be at least revenue neutral, but also states that "the business sector must be asked to contribute to restoring fiscal sustainability." This suggests the possibility that tax reform should increase overall government revenues by asking the wealthiest, which presumably includes businesses -- but not the middle class -- to contribute more.

The proposals of element five are that:

  • Business tax reform must be fully paid for.
  • Temporary business tax provisions that have been continually extended in the past and have been deficit-financed must either be eliminated or made permanent and fully paid for within business tax reform.
  • The normal ten-year estimating window for determining whether tax reform is fully paid for will be extended, although the length of the extension is not specified.


While much of the substance of the Framework has been included in President Obama's budgets in bits and pieces, the Framework is the administration's first attempt to advance its own "tax reform" agenda. In the past, President Obama (as well as President Bush) has left details of this discussion to Congress, committees and panels. While the tone of President Obama's "America first" proposals may prove to be popular in an election year, from a policy perspective, there is a fine line between reducing a distorting incentive and creating a new one, and the Framework retains, enhances or creates several. There are a number of competing tax reform proposals currently circulating in Washington, including several containing territorial principles on the international side. While it is clear that tax reform will not be enacted prior to the 2012 elections, the type of tax reform that may gain post-election traction will be determined in large part by the elections themselves.