With the United States a little financially strapped right now, lawmakers are including all kinds of remedies -- including a major overhaul of corporate tax laws.
Our current system's odd features often leave observers scratching their heads or shaking their fists. For companies and individuals alike, the sheer complexity of the tax code is a problem in and of itself. ExxonMobil, with tax returns running 20,000 pages, houses 35 full-time IRS employees at its headquarters just to help it stay in compliance. The tax returns of Warren Buffett's Berkshire Hathaway take up roughly 14,000 pages. Simplifying the tax code would save many companies considerable time and money.
A 25% solution
One reform that many have suggested, and which is currently being considered, involves lowering the corporate tax rate from its current 35% rate, while eliminating many corporate tax breaks. You might think that the business world would rejoice at such a reduction, but many businesses enjoy so many tax breaks and deductions that they effectively pay far less than 25% already.
According to the angry-about-corporate-taxes organization Pay Up Now, for example, Abbott Labs (NYSE: ABT ) paid the equivalent of a U.S. tax rate of 15% between 2008 and 2010, while Caterpillar (NYSE: CAT ) paid 5%. Companies that may see their tax bills shrink include MedcoHealth Solutions (NYSE: MHS ) , with a 2008-to-2010 rate of 38%, and Lowe's, paying 33%.
If reforms truly wipe out government subsidies and tax breaks, certain industries will really get pinched, particularly alternative energy companies. JA Solar (Nasdaq: JASO ) , for instance, paid a 12% tax rate in 2010.
Getting territorial
Another reform on the table would make our corporate tax system "territorial," like those of many other nations. A fully territorial system would exempt profits generated abroad from taxation in the U.S. As you might imagine, many global giants are salivating at this thought. After all, in 2010, 93% of Citigroup's (NYSE: C ) profits were generated outside the U.S., while that number was 64% for General Electric (NYSE: GE ) and more than 88% for Cisco Systems (Nasdaq: CSCO ) .
The corporate tax laws might not become fully territorial, but it's possible that they may become somewhat so.
A simpler tax system could be much less expensive to operate, and may generate more much-needed revenue for our country. But it's far from a sure thing, given the influence of massive corporate lobbying. Still, if big changes do make it into law, many otherwise excellent investments might get whacked hard.
Grab profitable tax tips in our Tax Center, and learn about two compelling small-cap companies the government won't let fail in this special report.
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