10Minutes on tax reform

Political and economic events are on a collision course with a tax system that, like Cinderella’s carriage, will disappear by midnight—in this case, midnight December 31, 2010. Nearly all individual income tax relief enacted in 2001 and 2003 will expire at that hour.

No one expects Congress and the next administration to wait until the clock strikes 12:00 to bring about reform of the tax code. But with changing political power and growing budget deficits, a simple extension of current law is unlikely.

While tax relief for individuals will drive tax reform, Congress also may consider business tax reforms to promote US investment and employment.

Yet with a tight government budget and a popular view against business tax relief, a key risk facing business is the potential for tax increases to more than outweigh any gains from tax reform.

Highlights

  • Congress will hold tax reform hearings in 2008, but real action won’t occur until after the next president takes office.
  • Reform could provide for the most significant corporate tax revisions since 1986.
  • Don’t confuse tax reform with overall tax relief. Federal budget deficits will create pressure for tax reform to be “revenue neutral”—i.e., tax cuts will be offset by tax increases.
  • With trillions of dollars of tax provisions under review, US companies must be alert to the potential risks of tax reform.