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C CORPORATION RATE CUTS ON THE WAY?

August 01, 2003

Will C corporations be finally be invited to the tax rate cut party?

Individuals have enjoyed across-the-board tax rate cuts, as the top personal rate has dropped from 39.6% to 35% since 2000. While C corporations have benefitted from some other tax cuts - especially the bonus depreciation provisions - their top rate has remained stuck at 35%. But the day of C corporation rate cuts may soon be upon us.

GOODBYE, ILLEGAL EXPORT SUBSIDIES

The rate reductions may come courtesy of the World Trade Organization. The WTO ruled some time back that the United States illegally subsidizes exports with the "Extraterritorial Income" (ETI) tax break. The WTO has authorized trade sanctions of up to $4 billion if the break is not repealed. The biggest beneficiaries of the break are large C corporation manufacturers - think Boeing and GE. The corporate rate reductions might be enacted to offset the loss of the ETI break.

There are two competing plans to repeal the ETI and satisfy the WTO. One plan, sponsored by Ways and Means Committee members Phil Crane (R, Ill) and Charles Rangel (D, NY) would reduce the effective tax rate on U.S. manufacturing income to 31.5%.

The competing plan, sponsored by Ways and Means Committee Chairman Thomas (R, CA) and Senator Orrin Hatch (R, UT), would provide a package of breaks, including an eventual reduction in the top rate for all C corporations - not just manufacturers - to 32%. (but see correction below.) The package would also speed up depreciation rates and provide other manufacturer-oriented benefits.

Correction: the 32% rate in the Thomas-Hatch proposal would be phased out for corporate taxable income over $1,000,000, and the 35% rate would continue to apply to taxable income over $10,000,000.

SO ACT NOW AND GET YOUR ILLEGAL SUBSIDY!

Both bills would phase out the ETI, in hopes of avoiding the $4 billion in retaliatory sanctions authorized by the WTO. In the meantime, companies with exports can legally use these illegal subsidies with surprising ease. For companies with annual export sales under $5,000,000, there is no requirement to even have an offshore office or representative. The ETI illegal only for the governement, not for taxpayers (now there's a switch)! And remember: Canada is a foreign country, so your sales there are eligible for the ETI break, while it lasts.

The detailed text of the proposals is here in PDF format:

Crane-Rangel
Thomas-Hatch

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